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 Holydays (sic).

 

-       Robert O. Weagley, Ph.D., CFP^(r)

 

Salus populi suprema lex esto. 

- Motto of the State of Missouri