Wednesday, August 15, 2018

Low savings rate …Borrowed Consumption Driven GDP Growth

We read everywhere that when macroeconomic data related consumption picks up we find Christmas type of celebration happening and hence the market concludes that economic growth is picking up. The market reads this data with huge confidence that people and economy are all in safety zones and the long-term prosperity of the economy is intact and the boom phase of the consumption should be taken for granted and this leads to expansion of business and trade. Consumption of borrowed capital is the old economic theory which leads to death in the long term. Reducing savings and taking up more debt has been one of the prime things which have been ruling across the globe. Savings the word might be heard or read less nowadays since consumption is all about economic growth despite a nation’s savings coming down to zero.

Keynesians economics principles were that consumption was the mother of sustainable economic growth but unfortunately we have burnt our fingers in 2008 with leveraged death. Inequality has been ignored at all aspect and we are paying the cost for the same. Over-leveraged export, dumping of goods and widening inequality have been a theme for the past decade. Now with the doors of globalization getting closed leads to a huge problem for this leveraged death.  Exporting countries particularly the ones who are dumping goods are now focusing on domestic consumption market but unfortunately, that market is also over-leveraged and the statistical data of savings rates speaks enough for the same where consumption growth is expected to be limited. The other side of the coin is inequality where proper penetration of the latest technology or even financial growth related seeds has not been planted. That data speaks about the inequality.  The data of both the low savings rates followed with Inequality levels. Interpretation of the Inequality data is that 1 means complete inequality.  
In my research I didn’t go into countrywide debt to GDP since in that data will not give a picture of the true savings rates country wise. The reason being that every country has da ifferent process of calculating there GDP to savings. For example, prior to the financial crisis, households’ “perceived wealth” increased due to inflated real estate values – the inflated values of their homes added to their perception that they were, in fact, wealthy – and the (perceived) need for savings shrank. 

The domestic consumption is not enough to support these economies since they are having low savings rates and high level of debt. The only grew are which one gets is the bridging the inequality and designing the products and pricing accordingly. Loan growth is being taken as a symbol of strong economic growth and disbursement of credit.

Household savings plays a vital role when the economic slowdown hits the road. The economy gets a major boost up when the household savings of a country is stable and strong enough to wither any slowdown. Low savings creates burden indirectly on the government where they have to bailout many segments of the society. Common people have no other option but to lookout for govt support and hence society gets into massive inequality.

We often hear that many countries corporate are sitting on cash levels and they are not investing. Well the reason being that cash is king in these economic volatile rides and hence we cannot take a plunge. Consumption based GDP growth has lead to an devastation where any dip in any economic growth will be detrimental to the economy itself due to poor savings rate. Loan based economic growth cannot be sustainable. China might be working on the same lines but that is not going to get the growth sustainable. All the QE are now getting winded up followed with interest rates being increased.  

The zero interest rates days are now over and hence the payback cost of the borrowed capital is now being felt across the global market.  Consumers who have enjoyed zero interest rate regimes are now finding the situation to be difficult and this burden will amplify.  Debt is now a serious problem for the economy as well for the consumers.  The only solution to the global economy would be fa ocus and a strategy polices to bridge the inequality gaps and move ahead accordingly.

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