Savings Ratio 1992- 2007 Flashcards
What were the reasons for a fall in household savings ratio during 1992-2007?
1) Availability of credit until 2007, encouraged people to take out loans
2) Rising home prices encouraged people to burrow due to the positive wealth effect, home owners could re-mortgage
3) cultural + social trends encourage an attitude of burrowing and spending
4) low interest rates
1991-92: interest rates were over 12%
2000’s: interest rates fell to 3%
Currently: 4.5%, less than inflation. This negative real interest rate discourages saving
5) There was also a fall in savings ratio in the Lawson boom of the 1980’s
What is the impact of saving?
A fall in house prices
Rise in unemployment
Rise in interest rates, may catch out many who burrowed heavily on credit cards
- Reduces AD and incomes on the circular flow for the economy
