More Unemployment Means Less Spending
I come across a series of news that the population is spending less because of the crisis. It’s not just that you buy less in quarantine. (Because you can’t go to restaurants, there are no concerts, tourism has stopped. You don’t need nice clothes if you don’t go anywhere. Etc.) Some people also think they need to spend less and save more.
Because what does the crisis mean? Your job may be much less secure than it used to be. Your company may go out of business, the whole industry you work in may be pushed into the background. The whole economy can remain at a lower level. Your wage can be reduced. Or, your income will remain at the previous level, but inflation will be higher. So the same money will be less worth. (We wrote about this earlier here: Are We Facing Epic Inflation, Horrific Real Interest, and Brutal Gold Price Explosion?)
Spending Less to Build Reserves
More uncertainty for the average sober-minded person means, we need more reserves. We can never rule out the possibility that even worse times will come. During wars, a golden watch was given for a pound of beans. Because a family’s life depended on it. It may never happen again like this, but it is also possible we are only a few months away from it.
The increase in uncertainty is triggering the drive to spend less and save more. We can also see this in the chart. This shows that in the crisis of 2008-2009, the savings rate fell first to a very low level. But after that, it rose higher and higher. Although, the world’s major central banks continued to cut interest rates.
Chart: 5 Countries from Crisis to Crisis – Savings Rates, 1999-2018
Because interest rates became low many people saved even more. Crossing the plans of the central banks, which tried in vain to stimulate the economy. (Or, the effect was moderate.) Because some people didn’t want to consume more. There is no point in giving companies a lot of credit at zero interest rates if there is no reason to invest. Because there is no extra demand for its products.
The Danger of the Vicious Circle
So, I expect the crisis to be longer than many people expected. The longer the crisis, the stronger the saving instinct in many people. The less they aim to spend, the less economic growth can be achieved. That is why the crisis will be even stronger. A negative spiral, “vicious circle” may form.
U.K. household deposits surge by record as shoppers stay home––wrote Bloomberg. Households continued to amass savings and pay down debt in May as stores remained closed for a second month in an effort to the stop the spread of coronavirus.
The big question is whether governments or central banks can interrupt this spiral. We already saw in the spring that U.S. President Donald Trump’s $1,200 gift many people spent in shares. (Read: Robinhood and The Woods of the Contrarian.) If people get gifted money again, or helicopter money, they may not spend it either. (Although the impact may be stronger than it was by the measures around 2009-2011.)
Spending Less Causes Stock Bubbles?
It is also a question of what people put their savings into. Because there is no real interest rate in most countries anymore. This may give a new impetus to the stock market. Also, precious metals, real estate investments. TINA is here–the new word means “there is no alternative”. These are the most important investments protecting you against negative real interest rates.
No one will consume only to develop the economy. The interests of the individual don’t coincide with the interests of the community.