The Other Side Of The Savings Coin 1
Mainstream narratives seem to believe that savings and expenditure are two sides of the same coin. What if this isn’t the case, and instead of it being a two sided affair, it is actually a trinity?
Which begs the question, if it is a trinity, what is the third point of the triad? Simple – income.
This is best observed in the aftermath of a downturn, when the phrase “pent up demand” comes to dominate narratives. Pent up demand really is what it’s name says it is – demand that for some reason or other was forced to stay bottled up being suddenly released.
The reason “pent up demand” is most often heard in the middle of downturns, or during periods of great economic uncertainty, is because consumer spending tends to drop sharply during such times. The conventional economic perspective puts this down to people not being willing to spend because times are uncertain, which is definitely true.
However, the train of thought takes it one step further, and claims that once the source of the uncertainty is removed, spending will bounce back, due to people having saved more money. This bouncing back is pent up demand.
The issue with pent up demand as a concept is not that it doesn’t apply in real life, because it does. The issue is that it paints too broad a picture across the economy, when reality is always much more nuanced. Consider these three general categories of consumers in the context of the current Covid related economic problems.
First, we have the ones who never really struggled financially over the past twelve or so months. This includes the richest people, along with those who cannot be considered rich, but had jobs that allowed them to work from home (or remotely). The key here being the ability to remain employed, with a stable and somewhat secure income stream.
Second, we have the people who lost their jobs but have jobs that they can go back to. This would apply to workers who were furloughed as companies cut production and/or service capacity in order to conserve cash and survive lockdowns. If the company was successful in its efforts, it will be able to scale back its capacity to what it was before lockdowns, of course contingent on a full reopening of the economy. Consequently, the workers in this category lost their incomes, but are lucky enough to have a job to return to.
In our last category, we have people who lost their jobs. Not temporarily as with those who were furloughed in the second category, but permanently. Their old jobs simply do not exist anymore, either because the company that hired them no longer has the resources to support their position and axed it; or because the company itself has gone bust. These workers have lost their incomes and their jobs. An example of this would be employees of businesses that were shut due to the pandemic, but will never reopen because they ran out of cash, and have no means of raising new capital.
To be concluded…
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