acting-man.com / Frank Shostak / November 5, 2016
Can Saving Possibly “Undermine Economic Growth”?
In his speech at the New York Federal Reserve of New York on October 5, 2016, the Federal Reserve Vice Chairman Stanley Fischer has suggested that a visible decline in the natural interest rate in the US could be on account of the world glut of saving.
According to Fischer, both increased saving and reduced investments have potentially significantly lowered the natural rate of interest. For Fisher and other commentators this could signify that the economy might have fallen into a situation where increased saving undermines the economic growth
Most economists are in agreement that in order to grow an economy, saving is a must. It is saving that funds investment in capital goods like computers, tools, and machinery, which in turn, make the economy more productive. It is argued that, while saving plays an important role in growing an economy, sometimes too much saving can actually be a bad thing.
For instance, it is held that if consumer demand is weak, then more savings will only undermine consumer expenditure and weaken economic growth. After all, it is held, the motor of the economy is consumer expenditure and saving is the opposite of consumption.
According to this way of thinking, if people decide on saving a large proportion of their income, then only a small quantity of output will find a market. Output will have to be low because there will be no demand for larger quantities of production.
Also, it is held that while saving may pave the road to riches for an individual, if the nation as a whole decides to save more, the result may be poverty for all.