Thursday, July 26, 2007
Why the Americans and Brits do not save for a rainy day
By John Kay
Published: July 17 2007, FT
The inveterate spending habits of rich American households are financed by the thrift of poor Chinese peasants. The explanation of this paradox has several elements, but the contribution of financial market deregulation is a paradox in itself. The more highly developed a country's retail financial services, the less that country saves.
The US, followed by the UK, has the most sophisticated range of products available to savers and investors in the Group of Eight rich countries. The large continental European economies – France, Germany and Italy – follow some way behind, and Japan and Russia come after that. That ranking is also the ranking of national savings rates, with the US and the UK at the bottom and Japan and Russia at the top.
Only the worthy Canadians – who benefit from American financial expertise and products but retain the thrift and caution appropriate to their chilly climate – are an exception to the general rule. These rankings – particularly the low savings rates of Britain and the US – are long- established and firmly entrenched.
Liberal financial markets give wider opportunities to save and to borrow, but they expand opportunities to borrow even more than they expand opportunities to save. Britain and the US have the most competitive mortgage markets, and have also been pioneers in equity release schemes that enable people to spend the capital gains accrued in their homes. These countries were also the first to adopt credit cards, and they still make the most use of them.
Italy, by contrast, has relatively less lending for house purchases than any other developed country, even though it has a high rate of owner occupation: well-meaning but inept regulation has inhibited the evolution of both the mortgage market and the rental market.
The common myth is that young Italian men remain at home because they cannot tear themselves away from Mamma's cooking. A more likely explanation is that they can find nowhere else to live. Italian law protects consumers by making it almost impossible to repossess a house, which achieves the intended effect in an unintended way by making it difficult to obtain a mortgage in the first place. When Mamma and son are not savouring the bolognese, they are both busily saving to find the substantial deposit needed for his house purchase.
Social habits and economic institutions are mutually reinforcing. German banks are conservative lenders, and German households suspicious of debt. This creates a frame of mind that justifies the old joke that banks will lend only to someone who doesn't need the money. And these banks are right to behave that way, because anyone who does need the money has stepped outside established cultural norms.
A wider and more attractive range of investment opportunities does not necessarily lead to more saving. If saving were a commodity like any other, better returns and wider choice would make saving more appealing.
But saving is not an intrinsic good; it is a means to future consumption. If you can expect – or are led to believe you can expect – indefinite double-digit returns from your stocks, you need put aside correspondingly less to achieve any particular goal. And savings have a precautionary purpose – what an older generation used to describe as providing for a rainy day. But the more options you have when a rainy day arrives, the less you need precautionary saving. The credit card and access to the equity in your home are always available.
None of this means that financial market deregulation is a bad thing. But I used to believe that the justification for an active financial system was that it made it easier to garner the funds needed to build schools and factories, shops and offices.
Yet active financial systems don't build more schools and factories, shops and offices. They are associated with higher shares of consumption and lower shares of investment in national income. The role of a developed financial system is to enable us to buy a Wii as soon as it appears in the shops and spend our retirement cruising the Caribbean. ¶ 1:08 AM
Published: July 17 2007, FT
The inveterate spending habits of rich American households are financed by the thrift of poor Chinese peasants. The explanation of this paradox has several elements, but the contribution of financial market deregulation is a paradox in itself. The more highly developed a country's retail financial services, the less that country saves.
The US, followed by the UK, has the most sophisticated range of products available to savers and investors in the Group of Eight rich countries. The large continental European economies – France, Germany and Italy – follow some way behind, and Japan and Russia come after that. That ranking is also the ranking of national savings rates, with the US and the UK at the bottom and Japan and Russia at the top.
Only the worthy Canadians – who benefit from American financial expertise and products but retain the thrift and caution appropriate to their chilly climate – are an exception to the general rule. These rankings – particularly the low savings rates of Britain and the US – are long- established and firmly entrenched.
Liberal financial markets give wider opportunities to save and to borrow, but they expand opportunities to borrow even more than they expand opportunities to save. Britain and the US have the most competitive mortgage markets, and have also been pioneers in equity release schemes that enable people to spend the capital gains accrued in their homes. These countries were also the first to adopt credit cards, and they still make the most use of them.
Italy, by contrast, has relatively less lending for house purchases than any other developed country, even though it has a high rate of owner occupation: well-meaning but inept regulation has inhibited the evolution of both the mortgage market and the rental market.
The common myth is that young Italian men remain at home because they cannot tear themselves away from Mamma's cooking. A more likely explanation is that they can find nowhere else to live. Italian law protects consumers by making it almost impossible to repossess a house, which achieves the intended effect in an unintended way by making it difficult to obtain a mortgage in the first place. When Mamma and son are not savouring the bolognese, they are both busily saving to find the substantial deposit needed for his house purchase.
Social habits and economic institutions are mutually reinforcing. German banks are conservative lenders, and German households suspicious of debt. This creates a frame of mind that justifies the old joke that banks will lend only to someone who doesn't need the money. And these banks are right to behave that way, because anyone who does need the money has stepped outside established cultural norms.
A wider and more attractive range of investment opportunities does not necessarily lead to more saving. If saving were a commodity like any other, better returns and wider choice would make saving more appealing.
But saving is not an intrinsic good; it is a means to future consumption. If you can expect – or are led to believe you can expect – indefinite double-digit returns from your stocks, you need put aside correspondingly less to achieve any particular goal. And savings have a precautionary purpose – what an older generation used to describe as providing for a rainy day. But the more options you have when a rainy day arrives, the less you need precautionary saving. The credit card and access to the equity in your home are always available.
None of this means that financial market deregulation is a bad thing. But I used to believe that the justification for an active financial system was that it made it easier to garner the funds needed to build schools and factories, shops and offices.
Yet active financial systems don't build more schools and factories, shops and offices. They are associated with higher shares of consumption and lower shares of investment in national income. The role of a developed financial system is to enable us to buy a Wii as soon as it appears in the shops and spend our retirement cruising the Caribbean. ¶ 1:08 AM
