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The savings depreciation factor and economic growth

De Koning, Kees (2014): The savings depreciation factor and economic growth.

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Cars and also equipment used in production processes depreciate in value through their use. Other assets like homes, share and bonds do not depreciate in the same manner. The latter asset values go up and down not as a consequence of the remaining life period, but because of their links with income, savings and interest rate developments in a country.

It is a well accepted fact that when average incomes grow slower than the CPI index, individual households cannot continue to buy the same package of goods and services as in previous years. The purchasing power of the income level is reduced. This can be called the “income depreciation” factor. The depreciation does not take place on the goods side, but on the money side.

Savings –the act of postponing consumption to a future date- can show the same type of “depreciation”. Savings are used to buy assets like homes, shares and bonds. Most individual households who want to buy a home need a mortgage to get onto the property ladder. They need outside equity –other people’s savings. Outside equity is usually provided by the banking sector. Mortgage lending by the banks can help to build more homes – the economic use of funds - but it can simultaneously cause a rise in house prices above the CPI index, provided that incomes keep pace with the latter – the financial or non-economic use of funds. These are non-economic because such price changes neither create output nor employment. Existing homeowners become richer on paper as their own equity in their home increases. However prospective homeowners see the value of their savings reduced. This phenomenon can be called “savings depreciation” and can be measured by the “savings depreciation factor”. In this paper the U.S. was chosen to demonstrate the impact of the savings depreciation factor and its relationship to economic growth levels.

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