Microsoft Word - Political Economy Review 2015 cover.docx

PER 2015

potential of the economy as productivity rises. However, this argument is based on two major assumptions; the first being that readily available funds will automatically cause businesses to expand when, in actual fact, business confidence levels will play a large part in the likelihood of this mechanism. Secular stagnation, which describes a situation in which savings are vast but there are little investment opportunities to boot; a scenario which arises as a result of low demand, would mean that high savings do not translate to investment and thus long term growth. This problem, which faces some of the major economies today, seems to have broken the Keynesian ‘Business Cycle’ which suggests that economies recover after and period of recession, with the global economic titans stuck in a period of stagnation following the global economic crisis. However; it’s not all bad. In theory, secular stagnation is only problematic if the entire of the world experiences it; as money can be borrowed from poorer countries with a glut of savings but little investment aspirations such as some nations in Africa. Not only will this stimulate export led growth as capital outflow s depreciate the domestic currency, but it will also provide funds for foreign economies’ investment projects, beckoning the question that; in a world where global economies are integrated and money flows so freely between them, is high saving necessary in the domestic economy for long term prosperity if some economies continue to save? Secondly, this assumes that if firms pump millions of pounds worth of capital investment into the economy, the productive capacity is sure to grow, which is a far more complex matter. This concerns the allocation of capital or to put it bluntly; what firms (or governments, should they choose to spend savings) actually spend their money on. For example, improvements in productivity drivers such as healthcare and education, areas which the recent Labour government sought to improve in the UK, will increase the potential of the economy, however, spending on renovating parks and other such areas will have a lesser effect on economic growth. An example can be made out of the Japanese economy in the 1990s, whose high savings were used by the government to concrete river beds and various other ill-informed uses which had little success in stimulating growth in the long term. A strong case can be made against the argument that saving is an integral aspect of strong economic growth, exemplified by Germany whose thriving economy stems from high domestic demand, despite plummeting savings levels, illustrated in the graph below as gross national savings fell by approximately 4% of GDP before 2010. This economic vigour has not been stimulated by the state, which has undergone a fiscal tightening in recent years, but stems from two major sources; falling interest rates and an increasingly weak euro. Falling base rates which, when passed onto consumers by commercial banks and matched by high levels of consumer confidence, have led to a spike in consumption; fuelling demand side growth as there is less incentive to save and it becomes cheaper to borrow with rates moving into negative territory. In addition, ultra-low interest rates force down the cost of government debt which, along with Germany’s fiscal prudence in recent years has improved their government budget position which crept into surplus in 2012.

5

Made with FlippingBook flipbook maker