Saturday, October 25, 2008
Economic dispatch: savings ratio
The latest ONS figures for the savings ratio show that for the first quarter of this calendar year, the average household dipped into its savings (or took on debt) to the tune of 1.1% of total resources (gross disposable income plus some investment income). That's the most negative it's ever been for a quarter since the quarterly records began (although the post-war years were certainly worse), and negative figures are not common in the data.Why's this important? Well, the government, in its "wisdom", has decided that Keynes is worth a go, and so they're going to try to spend their way out of the situation. I've already said, and stand by my opinion, that Keynes is a twit, and that government spending will not help. However, since they are committed to this lunacy, the least we can do is try to understand another reason why it's not going to work.Our elected Lords of Misrule will need more money in order to finance this spending spree, and there are three ways the government can get it. Firstly, they can tax it; secondly, they can borrow it; or thirdly, they can print it. Taxation slows the economy down, and slowing the economy down in order to speed it up is a bit barmy, so they're not going to do that. Printing is wildly inflationary, and frankly, it's political suicide to try simply printing all the extra cash.Borrowing, then, is the only resort, but if people are feeling the pinch, then the government's going to be a bit stuck for money. Interest rates will have to rise in order to attract the extra capital, which will push even more borrowers to the wall. Inflation will start up (because public borrowing and spending is always inflationary) which will hurt savers.Perhaps you begin to see, Keynes never works. But for the fact that public sector workers are overwhelmingly Labour-voting, we would cut spending back to the bare minimum and cut taxes as much as it allowed. We'd let people spend their money where they wish, and if they saved it, we'd celebrate a decrease in the interest rates offered on the High Street. And slowly, people would start to understand that boom and bust are a part of the cycle of free market economics, and that to beat the cycle would be like unto shedding one's own shadow.