Thursday, November 27, 2008

Private loss, public gain?

Since the credit crunch began in earnest I've been swotting up on economics. It's a fascinating study, fully of feedback loops and intuitively peculiar realisations.

For example: at the moment the average citizen of the UK owes a lot of money on mortgages, personal loans, and credit cards.

Intuitively you would suppose that high levels of debt are a bad thing and, taken to extremes, they are.

However what if everyone were to suddenly start saving? Anatole Kaletsky says this would be bad as well:

The main reason comes down to a simple proposition that almost nobody in politics seems to understand: for every saver there has to be a borrower.

This means that whenever people feel like they have borrowed too much and want to increase their savings, somebody else in the economy must increase borrowing to match the extra savings, pound for pound. Because every pound of savings is a claim on a pound of somebody's wealth - and the only way to acquire such a claim is either to invest directly in a house, a factory or a business asset, or to lend money to someone else who will do this for you. Putting money in the bank is just another form of lending, in this case to the bankers.

From what I can gather economic theory suggests doing all things in moderation.

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