Archive for November 25th, 2008

Have your say (I certainly will) – The paradox of thrift


Page last updated at 15:09 GMT, Monday, 24 November 2008
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The paradox of thrift

By Steve Schifferes
Economics reporter, BBC News 
Retail sales fell for a second month in a row
Should we save or should we spend?

Ed: Yes, bipolarise the issue. Well done.

It’s gloomy out there. The economy is shrinking, property values are falling and stock markets are in the doldrums.

Ed: It’s gloomy because the crappy economic ‘system’ has been welded onto most of our lives. If it never impinged upon us, there wouldn’t be any ‘gloom’. 

Many people borrowed heavily during the boom, and now are tempted to pay off debt or save more for a rainy day – something which until now has not characterised the behaviour of UK consumers.

Ed: They borrowed on interest to make more money. Granted, many have never had the opportunity to discover the harm this practice causes, but many others knew, and simply don’t give a damn. Who is tempted to pay off the debt? Do you mean the new jobless or homeless? Do you mean the remaining house owners who now have lower rates of interest on their loans? Who? And what debt? The untouchable personally unpayable debt the governmenthas saddled us with ‘bailouts’ etc?

 But if this happens, will the government’s plan to boost the economy through greater spending work?

Ed: Wait a minute. How can we spend more, if saving has never characterised the behaviour of UK consumers.??


Paradox of thrift

Because thrift may be a virtue for the individual, but could damage the economy as a whole, according to the economist John Maynard Keynes, writing in the midst of the Great Depression in the 1930s.

Ed: thrift as I understand it means cautious non-wasteful (prudential) money management – leaning towards the savings / nest-eggs. Aaah. Now we see where this article is going… guess what? It follows the government line they’ve recently been chanting “spend, spend, spend”

He called it the paradox of thrift. The more people saved, the more they reduced effective demand, thus further slowing the economy.

Ed: Well, mixed in with this is the “as demand increases, price increases” – and more money changes hands. Therefore, it’s “good” for “the economy” – translated means: It’s good for those who increase the financial distance between them and most other people. But this ultimately (and fairly rapidly) harms the people at the bottom tier of the financial pyramid who end up paying for that greed.

The virtue of ‘spending’ is only that it prevents potholes for this frankly speaking, rather nasty economic system during its operation. Why milk the ‘high demand’ opportunity to extract higher fees? What if we didn’t? Don’t you think the consequences would be a lot more pleasant for virtually everyone on the planet other than those at the top? Or isn’t Democracy supposed to permeate to this extent?

So yeah, if you save of course you’ll harm the greedy system. Mais oui!

This was one reason, he pointed out, that a recession can become self-reinforcing.

Ed: Message = save and (they say) you’ll make things worse therefore spend

Keynes also argued that, faced with slowing demand, businesses would not necessarily use the extra savings available in the economy to invest.

 Ed: Didn’t Keynes every say anythingin favour of saving? The appearance offered is that he didn’t.

In the Keynesian theory, as the slump in demand cascaded through the economy, the resulting slowdown would mean that everyone had less income – ultimately reducing the absolute amount of savings, even if people increase the proportion of their income they put aside.

 Ed: Guess no-one sees fit to mention that in the normal economy, the value of money has plummeted and that today even before the ‘sub-prime’ initial signaling that the scam was to take a new vibrant direction, that people today (and governments) are today in debt on a massive scale that simply dwarfs any debt help say 100 years ago. That’s right folks, the ‘fraud economy’ sucked you into a hole. All you are being offered is a burning rope to clamber into yet another deeper hole. BBC quality and balanced reporting you see.

As unemployment grew, investment would fall, whatever the level of savings.

Ed: I’m incredibly old fashioned, because I believe if a business makes a profit, then it is a worthy enterprise and should keep ticking along – employees included. But that’s just silly me. If I had any contempory financial respectability, I would cut jobs the moment successive year on year INCREASE IN PROFITS took a downturn.


Government help needed 
The government has slashed interest rates in a bid to boost spending.

Ed: Aaah. So far, ‘probems’ (savings) have been discussed because of YOU!. Now Government is mentioned with the word “help”, previously when ‘government’ was mentioned, it was accompanied with the word “boost” – Get the message folks?

 But how can we persuade the reluctant consumer to spend, and the reluctant businessman to invest?

Ed: So, one man, albeit a very insightful and textualising man, and some tiny portion of what he said has sealed the argument. ‘Saving is the big bad” – And don’t forget we still haven’t been offered any of Keynes’s insights as to virtues of saving {if indeed he had any}.

Keynes’ answer was that it was only the government that could overcome the collective paradox: what was good for the individual would weaken the economy.

Ed: Government good, Person bad. Oh, and who got us into this recession in the first place? Either by active participation in it (enticing interest rates, bailouts, massive overpayment for nationalising something engaged in fraudulent practices anyone?) or by failure to create regulate to prevent it from happening in the first place? Well, I guess as I have been told that it’s the people who are bad, then it must be them then! 

This is now the theory being embraced by the chancellor, who has abandoned his fiscal rules for the time being in order to pour money back into the economy.

 Ed: “Rules” that lead to….?  {Rules for us, opportunities and loop holes for ‘them}

And cuts in interest rates by the Bank of England are also designed to encourage businesses to continue to invest.

 Ed: Invest? Oopps, this is the age of leverage – I almost forgot. Being old fashioned I slipped into ‘old’ mode of imagining investment was done with real, tangeable savings. ‘Move over old git’ I hear. P.s. {Rules for us, opportunities and loop holes for ‘them}

But this is not very effective, because credit markets are in deep freeze. As a result, it is even more important to inject cash into the economy – at least according to Mervyn King, the governor of the Bank of England.

 Ed: anyone else feel like declaring and participating in freezing something that doesn’t really exists either? If enough of us do it, we’ll probably get a nice big payout for fear of collapsing the meaningless imaginary system? Yoo Hoo! Who’s in?


Spectre of deflation

There is another reason why the government wants to give a jolt to the economy now.

It is the fear that prices will actually start to fall as the slowdown gets going.

And deflation – falling prices – would certainly reinforce the paradox of thrift.

Ed: Can’t have those darkies and others we’ve already cut of of the system from being able to afford anything again can we? You see, once gain, falling prices only ‘hurt’ the vultures that were already doing very nicely from the situation before. You know, people who fund those lovely political parties of ours and own fine Tuscany based yachts for us to sip champagne on. We must help those suffering people.

If consumers expect prices to drop further in the future, then they have an even stronger incentive to delay their purchases until later, when they can benefit from lower prices.

 Ed: I went to the canteen today. Strangely they were selling food. I wonder if I should have gone up to the owner and said “You know, you could save money if you didn’t buy any food today but waited for the price drop in a couple of days.” Somehow, I can’t quite place why, but I don’t think she’d be all that impressed.

Deflation, especially in asset prices like houses, can be very long-lasting and hugely damaging to the economy, as recent experience in Japan suggests.

 Ed: Yes, better keep those house prices a ‘risin. Can’t have people breaking free of the 20 year debt now can we? Or those who buy simply to make more money out of peoples need. Deflation, like you = evil being! Can’t have a law that says “A house can only cost £500” 

So one reason the government may want to temporarily cut VAT now is to convince people that prices are going to go up later, thus encouraging them to spend.

Ed: And of course, they have looked at problems that arise from this, like the effect on the poor. they did look at the effect on the poor – didn’t they? Anyone?.


Rational expectations

Will these measures work?

One reason Keynesian explanations of the economy fell out of favour in the last few decades was the rise of a new economic theory – rational expectations.

Ed: But you’ve just finished advocating ‘spend spend spend’ based on a very small seciton of this one mans empirical evidence of a greed based, elite serving, manipulated system. And no doubt your readers were beginning to convince themselves that what they were reading was correct.

This argued that people were aware that any government borrowing would have to be paid back later. As a result they adjust their expectations accordingly, and do not spend as much as predicted.

Ed: So the government, in trying to get people to spend, never heard of this ‘new’ theory or paid it little/no attention?

Since this time, the government will be signalling its intentions to claw back the money it spends in future budgets,…

Ed: Aaah! The government is going to ‘save’. No comment on negative implications of this?

…perhaps we will all save more to cover our future loss of income.

Ed: People obviously need income to pay their expenses. They only need to save for when they want to purchase something of significant cost, to provide some security for ill health or as security for when the inherently fraudulent system belches. If their needs were constantly met by a guaranteed ability to acquire income, if houses were made to cost £500, cars (which really we should design life to avoid having to use) the same, free or near-free schooling and health treatment then nobody would need to save. Really! Are we so stupid we can’t design an economic system that negates the need to save? Of course we can, it’s just that people throughout history who have considered themselves as being superior to others, have implemented a system which maintains that relationship. Worst of all, we have stupidly allowed it to survive.

This theory may well apply to the financial markets, which are making the price of UK debt more expensive on the grounds it is likely to expand dramatically.

Ed: They make it more expensive by lowering interest rates? Mmmm! But of these ‘markets’; they certainly aren’t the kind of markets I would like to see – and lets stop calling them ‘markets’ – giving them the veneer of respectability – and call them for what they really are… Gambling dens. Given my way these ‘markets’ would be scrapped. Only those markets in harmony with catering for the needs of ordinary people proper markets should be allowed to survive. 

But the psychology of individuals may be different.

In the first place, some people may not be able save much whatever their expectations. Money that goes to pensioners surviving on the state pension, for example, may go straight into spending.

And some psychological research suggests that people do not “discount” very effectively in the long term.

So we may be under-estimating the attractiveness of spending even in the midst of a recession.

Returning to the single source, ‘murder hole’ of Keynesian ‘philisophy’, telling you not to save in the first place. I wonder if anyone has heard of aspect of psychological that identifies ‘if a lie is repeated often enough, it will be believed’. Notice the ‘may’. This is the ‘guilt free’ clause published so that then people believe this article and spend for the ‘good of the economy’ whatever that means (it usually means ‘help rich people stay rich’) then when they have no money and even more debt the BBC can say ‘Well, we didn’t say it WOULD help’.

This, at least, has to be the government’s hope as it embarks on its most audacious economic U-turn since Labour came to office in 1997.

Ed: Here we go again. “Government” and “hope”. Do these BBC journo’s take psychology lessons? Given the reference to it in the article and the fact this ‘economic financial system’ (read: ‘economic scam’) as well as political system does rely on fear and mind games, you would have to say ‘yes, they probably do’.

My opinion is: If the BBC are advocating spend, then its probably better not to. The BBC Newz department is simply an outlet for government spin, Newz heavily overlaps with finance of course, and I think it’s safe to say from a cursory examination of (particularly)modern government policy, they don’t give a damn about you – in fact they want to screw you, unless of course you happen to be of reasonale wealth. In that case, they love you.

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