Household savings and Covid crisis

If one looks back during the times of 2008 depression, it would not be uncommon to observe that the savings were soaring high. The reason was simple. People was unaware about the future of the depression and therefore, found it wise to adopt the nature of frugality. Any rational individual would have done the same thing. So, did the savings helped the economy to recover? Or the more important question that is lurking today, is saving the right way of dealing with the crisis?

No. It might sound so. As any economic graduate will tell the basic thing, that savings act as the leakage in the economy. So, the amount saved, are not flown into the cyclical macroeconomic policy, that results in the lower production and lower services, which ultimately brings the economy to halt.

According to an article on BBC, in the surveys conducted on many households in the developed nations, many people still want to rest their savings with the banks, thereby, excluding this money from the circular flow of economy. This might not seem as a healthy sign, as, and when the economy still under strain from the pandemic driven recession. The main reason for such behaviour of the households is the uncertainty. As the pandemic is still looming over, the people are not just sure how the economy ultimately be pan out.

High GDP means high savings?

Not necessarily. One might think that, with high growth and GDP, comes the high savings. But this not necessarily true as described by Piotr Misztal in his decade old study “The relationship between savings and economic growth in countries with different level of economic development“. In this study, he mentioned about the one- way causal relationship between the GDS (gross domestic savings) and GDP (gross domestic savings) i.e., growth of GDS was the reason of the increase in growth of GDP but not vice-versa. Therefore, high GDS is important for the GDP to grow. This is the case both for the developed, as well as, for the developing economies.

Savings- a virtue or vice?

That has to be seen in the context. It is not debatable that, savings at present, will lead to the investment in future. But that depends upon the two important things.

Primarily, the time span. If savings are not utilised in the longer run, it will not play its part effectively in the macroeconomic cycle. Secondly, the intent. If the intent is not productive. i.e., if the investment is high on commodities like oil and real estate like enterprises, as beautifully explained by Ruchir sharma in his new book “the 10 rules of successful nations”, the savings will not amount to good results.

The intent is not the problem with the developed nations as such, as they are already on the path of high trajectory growth. But, it might pose problems for the developing economies, like India and Brazil, where, the economic growth experiences upswings and downswings.

BBC in the same article (mentioned above), has forecasted the growth by the expansion of 7.25 % in the year 2021.

This might have been attributed to the high savings, that the people are generating during the COVID times. If we go by Adam Smith, the savings are a virtue, if invested in proper manner. On the other side, if we go by Keynes, the less the people save, the better it will be for the economy. He underscores the importance of not saving in his famous concept of ‘Paradox of thrift’, that actually refuted the theory of ‘fallacy of composition’.

Finally, how to use savings?

Savings, more importantly, depends upon the situation, in hand. In the present times of pandemic, savings might prove to be a virtue for the simple reason that, even if it spends upon the investment, even upon the highly productive ones, the necessary outcome might not be shaped into reality. Any investment requires the interaction of the people on a large scale. But the interaction has been restricted by the pandemic-driven obvious reasons. Though, some investments can be directed towards the ‘virtual world’. Since, the presence of virtual phenomenon is high in case of the developed world, therefore, there is high probability of success of high investment in this sector. This advantage is clearly not on the side of developing world, as the population, directly connected with the internet is still abysmally low in case of developing nations. For instance, the internet penetration in India is just 45 % , in contrast to the developed economy like USA, where it stands around more than 85 %. At the same time, Internet is not so much investment-driven sectors, if we compare it to sectors like, construction and capital goods.

The bottom line

So, the linchpin of the above argument will be, saving in these pandemic times should  be high for the developing economies, in comparison to that of the developed economies.

About the author

vipal

My name is Vipal Bhagat, going to be doctorate in applied economics. My aim is to analyse and interpret the current economic happenings around us, according to the core and basic principles of economics.

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