Archive for November, 2010

Spending, Saving and Overall Consumption

November 4, 2010 Leave a comment

Economic crises tend to rely upon governments for action to ‘right this wrong’. Whilst governments are vital for the commanding of resources and utilisation of the instruments of economic control, the greatest influencer of economic activity, in and out of crisis, is the consumer. The desire and demand to consume drive economies forward.

Having established that the consumer is the most valuable part of the economy, without which the economy would grind to a halt, however the broad areas of consumption have yet to be discussed and the ideal course of action suggested.

Consumption can be divided into two broad areas: spending and saving. The latter shall be dealt with first.

Saving for the sake of saving is bad for the economy as it removes money and demand out of the economy. This is not to suggest, however, that saving, overall, is unacceptable. There are four variants of saving: deferred spending; proxy spending; stagnant spending; and non-spending.

Saving in order to spend at a later date, say for a house or a car, is acceptable. This is because money is temporarily taken out of the economy in order to acquire a good or service that one would not normally be able to acquire. This type of saving can be referred to as deferred spending.

Investments, in the stock exchange, bond markets etc., can be referred to as proxy spending as the investments allow someone else, a government or company for example, to spend the investor’s money. As the money is returned, usually with interest earned, the cycle can begin again.

Saving accounts, and other saving mechanisms, in the country of origin of the creation of wealth can be referred to as stagnant spending. This is because the wealth is sitting idle and is unlikely to be used in the same way as deferred spending yet, depending on the amount, is taxed and spent that way. Stagnant spending is neither unacceptable nor acceptable.

Saving mechanisms existing outside of the country of the origin of wealth, the off-shore accounts, can be referred to as non-spending. This is because wealth is taken, not just out of the economy as with stagnant spending, but beyond the reach of the tax services. These off-shore accounts are usually based in countries that have little to no tax regulation meaning that the wealth is not only taken out of the national economy, but the global economy as well. This is the most unacceptable form of saving as it is saving for the sake of it.

Spending, on the other hand, is desirable as it circulates money in the economy and sets the demand for goods and services. There are two variants of spending: current spending; and forward spending.

Current spending is the more desirable as it promotes sustainable living. The income revenue is spent throughout the revenue period, whether that is weekly, monthly or annually. This is the most stable form of spending.

Forward spending, on the other hand, is credit based spending where money is borrowed, as opposed to saved, for a big purchase or, alternatively, as an emergency purchase. Forward spending is a more expensive option than deferred spending but is necessary for unforeseen events. However forward spending, as must deferred spending, be factored into current spending otherwise spending levels will become unsustainable and economic hardship and/or ruin will be the only options available.

To conclude, there are two broad ares of consumption: saving and spending. Within saving there are four further categories: deferred spending; proxy spending; stagnant spending; and non-spending. Deferred spending and proxy spending are desirable, stagnant spending and non-spending are not desirable and unacceptable forms of saving in the economy. Within spending there are two further categories: current spending and further spending. Current spending is the most desirable form of consumption and forward spending is as equally acceptable and desirable as deferred spending and proxy spending. All this, minus stagnant spending and non-spending, will drive the economy and continuously produce modest growth, with the growth rates changing between sectors as patterns of consumption change.

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