Home Economics Surprise! People Save In Recessions!

Surprise! People Save In Recessions!

Author

Comments

This really shouldn’t be such a surprise to The Guardian. People save in recessions – Film At 11!

British households repaid the most money borrowed on credit cards and loans in 2020 since records began almost three decades ago, as consumers cut back spending during the coronavirus pandemic.

Figures from the Bank of England show £16.6bn of net repayments on credit cards, personal loans, student borrowing and car finance last year – the most repaid since 1993 and the first annual net reduction since 2011, when the UK was still recovering from the financial crisis. Consumers had racked up £13.2bn of extra debt in 2019.

Err, yes? People save in recessions. Paying down debt is saving. This causes problems. In fact, it’s the basic insight of Keynesian responses to recessions:

The big worry was that standard Keynesian one. We have an interruption in the economy – for the logic here it doesn’t matter why – and that makes us all worried, unwilling to spend. So, the economy then spirals down into ever deeper recession and possibly depression. The bigger the shock the more likely this is to happen.

This is what Keynes called the paradox of thrift. In the bad times it’s entirely logical for each of us to save. But if we all do it that means there’s nothing happening in the economy any more. Our own fear creates the recession.

This is why we worry if the savings rate jumps, it’s the very thing that will cause a recession. Similarly, deflation creates the same problem. If everything will be cheaper tomorrow then we’ll delay purchases to gain them cheaper. This equally kills the economy as we all wait.

Debt paydowns, a rise in the savings rate:

Official figures show the UK’s households savings ratio – a snapshot of household savings as a proportion of disposable income – soared to a record high of 27% in June last year, and has remained at historically high levels since.

7 or 8% is more normal.

Shrug. Which really leaves us with just the one question. Given that this is at the core of the Keynesian economics the Guardian purports to support why the surprise here? Unless it’s just that they don;t understand that Keynesian economics they support?

SUPPORT US WITH A SUBSCRIPTION?

3 COMMENTS

  1. “People save in recessions” . They also save when they they aren’t permitted to spend. Personal debt goes up when people have expensive holidays, meals out and lavish shopping trips. It goes down gradually as they pay off the debt when cash is available. People probably aren’t making a decision to save. A spending and debt boom will come in the new roaring 20’s

  2. The reason the savings rate is so ridiculously high is because it’s not brought about by fear, but by expectation. People aren’t putting aside money “for a rainy day”, they’re planning a stonking holiday next year because they weren’t allowed one last year. People aren’t saving on going to pubs, restaurants and cinemas out of restraint or concern for cashflow, but because they’ve been closed by diktat.

    Anecdatally, I’ve put off changing one of the cars because I’m not allowed to go and do a bunch of test-drives and I’m not spending that kind of money without doing some thorough research.

    This is the main reason I’m confident of a V-shaped recovery: there is a significant number of people with money burning a hole in their pockets who are itching to get out and spend it.

  3. Some of both effects in play here. Some saving may be because of Lockdown taking away options, but I also know quite a few people who are impulse buying wildly online out of boredom & frustration. I definitely see more people who are worried about their financial position who have cut back spending, which also happened in 2008. If my job is in doubt I am likely to switch to the cheaper TV plan, pass on the lobster at the supermarket, etc.

LEAVE A REPLY

Please enter your comment!
Please enter your name here

expunct

in British English
expunct (ɪkˈspʌŋkt)
VERB (transitive)
1. to delete or erase; blot out; obliterate
2. to wipe out or destroy

Support Us

Recent posts

To Introduce Environmentalists To Political Reality

Grist is part of that unthinking - the fat and thick end - of environmentalism. Which is why they ask questions like this: Why won’t...

Sperm Counts May Well Be Falling, Yes

A new reason we should all do something - or stop doing some other thing - which is that sperm counts are falling. If...

So, Revera Dodges Taxes, Does It?

Another one of the tax justice groupuscules wishes to tell us that Revera - a manager of care homes - dodges UK taxation. As we'd...

Free Speech Means The Liberty To Be A Pinhead

The Establishment - whichever one there is at any time - has been determined to beat back the threat of free speech ever since...

Just How Stupid Can You Be About British Recovery Bonds?

This Starmer idea of British Recovery Bonds. Or, as Richard Murphy is claiming, his idea of stealing everyones' savings. It's possible to wonder at...

Recent comments