collage of money, charts, student working and graduating

When the Hoard Hordes

horde ( ˈhȯrd), noun

1 a : a political subdivision of central Asian nomads b : a people or tribe of nomadic life
2 : a teeming crowd or throng

hoard (ˈhȯrd), verb

1 : to lay up a hoard of
2 : to keep (as one’s thoughts) to oneself

Mea Culpa….

Last week, one of our readers caught me using horde when I meant hoard.  I told him I would apologize and I hoped I could find a way to use it in the last tip of 2009.  (Yes, I’m taking a break until 8 January.)  While eating Thai food last Friday night, I came up with a title for today’s tip and all I needed was something to write in the body of the tip to go with the title.  So, here goes.

We hear a lot about savings rates and the economy.   It can be argued that the more we save, the faster the economy will grow, as interest rates will be lower and we can invest in capital and equipment to increase productivity.  On the other hand of the economists, it is argued that if we save and not spend, the economy will be slowed – simply because people are not buying what is produced by the economy.  Lord Maynard Keynes called this the The Paradox of Thrift.

Below is a list of countries with their average savings rate and rate of growth in their Gross National Product (GNP) for the years indicated.  You can see that, for most countries, there is a negative correlation between the savings rate and the rate of GNP growth.  That means the following: as savings rates go up, GDP growth goes down – thus the negative.  Yet for a few countries, notably Greece, Korea, Mexico, The Netherlands, New Zealand, Poland, Spain, and Switzerland; the correlation between savings rates and GDP growth is positive.

Country

Years

Savings Rate

GDP Growth

Correlation

Australia

1959-2004

8.64

3.28

-0.102

Austria

1995-2003

8.53

2.14

-0.007

Belgium

1985-2003

13.3

2.23

-0.328

Canada

1970-2005

10.89

2.51

-0.128

Czech Rep

1995-2005

3.76

2.84

-0.030

Denmark

1981-2004

0.82

1.73

-0.396

Finland

1975-2005

1.96

2.62

-0.570

France

1978-2005

11.85

2.18

-0.188

Germany

1991-2005

10.77

1.49

-0.082

Greece

2000-2005

-6.17

4.16

0.744

Italy

1999-2004

10.43

1.39

-0.791

Japan

1996-2004

7.92

1.22

-0.462

Korea

1975-2005

15.28

6.8

0.176

Mexico

1993-2002

6.83

2.96

0.570

Netherlands

1995-2005

10.77

2.32

0.516

New Zealand

1986-2000

-0.91

2.1

0.064

Norway

1978-2003

3.41

2.77

-0.125

Poland

1995-2005

8.91

4.34

0.492

Portugal

2000-2002

4.03

1.84

-0.506

Spain

2000-2004

5.58

3.99

0.297

Sweden

1993-2004

7.16

2.83

-0.369

Switzerland

1990-2004

11.65

1.2

0.085

United Kingdom

1987-2005

3.27

2.5

-0.357

United States

1970-2005

4.55

3.07

-0.114

Europe

1991-2003

11.39

1.96

-0.531

To be honest with you, I do not know exactly what this means, although the average correlation is negative.  The negative implies that Keynes is correct and the more we save, the lower will be the rate of growth.  Of course a lot more goes on besides savings.  Innovations, exports, imports, creative discoveries, comparative advantages, wars, disasters, and other events often lead to greater or lesser economic growth, regardless of the savings rate.  (If you don’t believe me, read more about the impact of the introduction of the computer to the world during the 1980s and through the 1990s.)

One thing I do know and I know this with certainty.  If you save, while others are spending and the economy is growing, your savings will accumulate and you’ll be better off financially at the end of the period than the debtor – assuming your investment returns outpace inflation.  Thus, the mantra: Savings good, debt bad.

I wish everyone the best.  I’ve got to grade my finals and finish my shopping.  My son gets back from Michigan tomorrow and my daughter, from Pennsylvania, on Sunday.   We just had a visiting research scholar arrive from Beijing and she needs a place to call home for the year.  Simply, I’ve got productivity to add to our economy.

We are busy.  We are blessed.  Just like you.  Enjoy Your Holidays (sic).