Liquidity Trap
The Instituto Nacional de Estadística has released its quarterly report on Spain's national accounts. Outstanding was the rise in the country's personal savings rate - at 7.9% compared to 4.8% in the year earlier period. In absolute terms, household savings have increased from 8 billion to 13 billion euros.
Further on in the press release, the section on the public administration sector notes their disposable income has decreased some 19% over the same period. Behind this is a 12% decrease in tax receipts. This is divided into a 15% drop in value-added, and a 7% diminution of income, taxes collected.
Adding to these two the 18% increment in government social expenditures and we come up with none other than the feared liquidity trap - money thrown at the economy to prevent disaster resulting in a more than 50% increase in the rate of savings, and little else.
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4 Comments:
Liquidity trap, a situation where economic agents suddenly stop letting their debts grow beyond control? Giving the system some chance to survive and part of the debts to be paid back.
That a definition, certainly academically correct at least in the recent acceptation of economics. This definition is not mine however. This pseudo-science neither.
Sometimes, households have more financial expertise than their governments.
I agree with you mostly - even though you give me the impression that you're challenging some opinion I certainly didn't express in the piece, merely because I used a generally accepted term.
The problem comes when governments end up funding, through social security, increased savings with more debt. Changing the debtor doesn't really solve the problem although it may string it out along a different time line.
In any regard (and this was more my point), it is certainly not the outcome that governments think optimal.
Charles,
Spain really needs to adjust to a new world which for the time being probably means a national income 10% below where we were at the beginning of the crisis. There is no way, in the current environment, it can continue adding to its massive stock of external debt.
What this means I think is that households and businesses need to rebuild their balance sheets and that means saving (or paying off debt, which is really what it is).
I don't think the fiscal stimulus was the right policy for Spain. Having said, and without fully understanding the FROB even though you have explained it, I think I would have rather seen the policy of changing the debtor (as you put it) from households to government rather than the current course of action.
B,
The fiscal stimulus (as delivered by Plan E, at any rate) has been, whether one likes it or not, fairly ineffective when compared with its stated goals. Obviously, personal consumption has not been affected. And the unemployment rate remains unchanged because most of the money is being spent on municipal street repairs. Builders, who cannot sell the homes they are working on with minimal staff, shut down their work sites for a few weeks and go lay cobblestones instead. Similarly, estimates of multiplier effects will be grossly exaggerated.
Then again, if one departs from the notion that government economic policy is mostly centred on salvaging the banking system - particularly the politically critical cajas - then the increase in the rate of savings/decrease in personal debt funded by the social security system may be a desirable outcome.
It's all zero sum at best, but over a range of time frames.
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