The green shoots debate is reaching something of a crescendo. Reading yesterday’s ‘Sunday Times’, I was tempted to start believing that not only was the recession coming to an end, but the UK has years of boom to look forward to. The data in recent days has indeed been promising. But there is a snag, and we need to factor this in before we catch the euphoria bug. Actually the snag can be summed up in one word:
That one word is savings.
First of all, here is some data. I touched on it the other day. Despite the fact that interest rates have been at a record low for several years the Brits are saving more. In Q2 this year, household income rose by 1.6 per cent over Q1, but expenditure fell. Why? Because we saved more.
In part Brits are saving more because they have no choice. Thanks to a shortage of credit, and thanks to the fact that house prices are no longer booming, many households can’t fund spending by topping up mortgages like they used to.
Linked to that argument we are seeing what Paul Krugman and Nomura’s Richard Koo, who are perhaps the two leading economists in the world and are anti-austerity, is the concept of a balance sheet recession. I am partly cynical about claims that the UK economy will be expanding at 2 per cent a year or more within 18 months or so, because I don’t think we are even close to seeing an end to intense pressure on household balance sheets.
In the first part of 2008, when many economists were still insisting that the UK would avoid recession, the point about balance sheets and leverage had been overlooked.
But there are other factors at play here. The best time to retire was probably around 1999. During the previous 20 years or so, savings were modest but who cared? Companies and employees may only have invested modest sums into pension funds, but thanks to the stock market boom, these sums compounded, and funded a pretty attractive pension on retirement. When shares crashed, households began to rely on rising house prices to fund their retirement.
This time it is different. As the baby boomers approach retirement they are beginning to realise they need to save much, much more. They can no longer rely on the magic of soaring stock markets or house prices; instead they have to save the hard way, by actually giving up consumption today.
I just don’t see how we can avoid seeing a steadily rising savings ratio over the next one and a half decades. Some might say this is a good thing. Maybe it is, but it is also clear that as Brits save, consumer demand will fall. In such circumstances growth can only occur via investment (but why invest when demand is so low), exports or government spending.
I think there is another more subtle factor at play. I think there has been a change in attitudes towards saving. During the boom years it was as if not saving was form of machismo. Older generations used to love quoting Shakespeare’s Polonius from Hamlet, “Neither a lender nor a borrower be.” Maybe it is a symptom of my age, but it seems to me that saying is coming back into fashion.
I don’t think economists get what’s going on. That’s why their forecasts two years out seem to be consistently too optimistic. That’s why so many failed to predict the recession of 2008 and the recession of this year.
What’s the solution? It seems to me that under such circumstances sustainable growth can only occur via the government borrowing the money savers are so keen to lend to it, and then invest this directly in infrastructure and indirectly by encouraging wealth creating entrepreneurs in as many different ways as possible.
There is another idea, gaining momentum, and that is some kind of huge scale programme of debt forgiveness, perhaps promoted by the central bank. I will turn to that idea in a few days.
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