Monday, January 12, 2009

Puritans versus spendthrifts: recession’s culture war

This is the title of an FT article and poses a simple question.

How should people be persuaded to consume rather than save? How, in a fearful world, where knowing what tomorrow holds has never been more difficult, can you get Jo Public to flash the credit cards and add even more to their unpayable end of month balance. The much quoted Keynes described this as the paradox of thrift – the more people saved, the more demand for goods and services fell, the few people were employed etc etc.

This question is, I am sure, being discussed all over the world and has a special relevance to the 50-plus.

The article argues that the groups most likely to be convinced by government nudging and entreaties are the young and the poor who are already happy living in debt. Those who already have some cash and assets (i.e. the older age groups) are less likely to spend and more likely to save.

The other reason this is likely to be true is that older people have already lived through a couple of recessions and remember how incompetent politicians made the situation worse rather than better and can see the same thing developing.

So what do governments do about this problem of the puritan older person? There are four steps:

Step1. Try appealing to their sense of duty and love of the nation (i.e. spend for Britain / America). When that fails...

Step 2. Cut interest rates so the value of their savings diminishes even faster. When that fails…

Step 3. Spend wads of government debt on “infrastructure projects/investments” that are supposed to stimulate the economy but never do, or at least never do in the right time scale. When that fails…

Step 4. Let the money supply rip and watch the value of debt diminish along with their savings.

Any smart finance company would recognise that this money to be made from this progression. At some day in the next 12 months (my guess) there will be a tipping point when older people realise that their savings are diminishing at an ever increasing pace and at that point will want to lock them into assets. This is a real business opportunity. Dick Stroud

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