To Save More or To Spend More?
By Pauline Yong
19-1-2009
for the current financial crisis. This article attempts to explain that no
doubt overspending is a bad practice and it is indeed detrimental to the
financial health of an economy, however, in the midst of a recession, we
need spending to stimulate the economy.
According to statistics, the U.S. has raked US$10 trillion in their total debt,
which means each citizen of the US bear approximately US$35,000 of the
debt. There is an interesting graph that shows the relationship between the
US presidents and the US debt level. According to the graph, the culprits
apparently are Ronald Reagan, Bush I and Bush II who have accelerated
the speed of debt accumulation in the US for the last three decades.
For those who have little background in economics, let me explain further
the consequences of having too much debt in a country. Imagine you own
a small company, due to expansion plan, your company is borrowing
more and more. Finally you will come to a point when the banks either
stop lending money to your company or they will lend the money to you
at a much higher interest rate as the risk of default for your company is
high. As a result, like a snow ball effect, your company’s debt is rising at
an increasing rate and the net worth of the company is falling.
Now, imagine this happen to a country – rising debt at a national level
will increase the risk of a country, the value of the country’s currency will
fall and the central bank is forced to raise interest rate to protect its
currency. Hence, this explained the weakening of the US dollars as well as
their stock market and property market as investors dumped US
denominated assets for fear of losing value in these assets.
Since overspending signifies disaster to an economy, does saving solve
the problem?
According to an English economist John Maynard Keynes (1883 – 1946),
'saving is equal to investment'. Without the proving of equations, it is not
difficult to understand this concept. Simply put, the money people save in
the banks can be used by the banks for lending to firms for investment
purposes. Hence, the more you save, the more will be the investment level
in an economy. However, this is not always true in practice as not all the
saving is translated into investment due to government policies, business
confidence and other factors.
In addition, according to the Paradox of Thrift theory, the more you save,
the less will be spent in an economy which means less economic activity is
stimulated. Therefore, saving is only good for up to a point.
Let’s put it this way, saving is a virtue, it helps an economy to accumulate
funds for investment, so that the country need not rely on foreign
borrowing for investment. In normal economic condition, government
should encourage its people to save. However, in the times of recession
where the general demand is weak in an economy, the government should
encourage people to spend in order to stimulate the economy. But what if
the people are too poor to spend? Then the government may step in and
make provision for more public goods, give more subsidies and welfare
benefits to the lower income group, slash taxes for both personal and
corporate levels; and most importantly, to encourage people to spend!
For example, the Taiwanese government has introduced a NT$82.9b worth
of shopping vouchers for its citizens to spend last year. While in Malaysia
we do not have shopping voucher, but we do have a stimulus package of
about RM7b to be injected into our economy this year.
Spending at the private and the public sectors can help stimulate the
economy, which is evidenced by more and more governments around the
world using their fiscal measures to boost their economies. However,
what is equally important is "how" to spend the money? As it is very
important that they spend their scarce resource prudently and wisely. And
remember the golden rule: "spend within your means!"
By Pauline Yong
19-1-2009
for the current financial crisis. This article attempts to explain that no
doubt overspending is a bad practice and it is indeed detrimental to the
financial health of an economy, however, in the midst of a recession, we
need spending to stimulate the economy.
According to statistics, the U.S. has raked US$10 trillion in their total debt,
which means each citizen of the US bear approximately US$35,000 of the
debt. There is an interesting graph that shows the relationship between the
US presidents and the US debt level. According to the graph, the culprits
apparently are Ronald Reagan, Bush I and Bush II who have accelerated
the speed of debt accumulation in the US for the last three decades.
For those who have little background in economics, let me explain further
the consequences of having too much debt in a country. Imagine you own
a small company, due to expansion plan, your company is borrowing
more and more. Finally you will come to a point when the banks either
stop lending money to your company or they will lend the money to you
at a much higher interest rate as the risk of default for your company is
high. As a result, like a snow ball effect, your company’s debt is rising at
an increasing rate and the net worth of the company is falling.
Now, imagine this happen to a country – rising debt at a national level
will increase the risk of a country, the value of the country’s currency will
fall and the central bank is forced to raise interest rate to protect its
currency. Hence, this explained the weakening of the US dollars as well as
their stock market and property market as investors dumped US
denominated assets for fear of losing value in these assets.
Since overspending signifies disaster to an economy, does saving solve
the problem?
According to an English economist John Maynard Keynes (1883 – 1946),
'saving is equal to investment'. Without the proving of equations, it is not
difficult to understand this concept. Simply put, the money people save in
the banks can be used by the banks for lending to firms for investment
purposes. Hence, the more you save, the more will be the investment level
in an economy. However, this is not always true in practice as not all the
saving is translated into investment due to government policies, business
confidence and other factors.
In addition, according to the Paradox of Thrift theory, the more you save,
the less will be spent in an economy which means less economic activity is
stimulated. Therefore, saving is only good for up to a point.
Let’s put it this way, saving is a virtue, it helps an economy to accumulate
funds for investment, so that the country need not rely on foreign
borrowing for investment. In normal economic condition, government
should encourage its people to save. However, in the times of recession
where the general demand is weak in an economy, the government should
encourage people to spend in order to stimulate the economy. But what if
the people are too poor to spend? Then the government may step in and
make provision for more public goods, give more subsidies and welfare
benefits to the lower income group, slash taxes for both personal and
corporate levels; and most importantly, to encourage people to spend!
For example, the Taiwanese government has introduced a NT$82.9b worth
of shopping vouchers for its citizens to spend last year. While in Malaysia
we do not have shopping voucher, but we do have a stimulus package of
about RM7b to be injected into our economy this year.
Spending at the private and the public sectors can help stimulate the
economy, which is evidenced by more and more governments around the
world using their fiscal measures to boost their economies. However,
what is equally important is "how" to spend the money? As it is very
important that they spend their scarce resource prudently and wisely. And
remember the golden rule: "spend within your means!"
ATRTICLES
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