Cart has included a posting about the importance of savings which I agree.
Credit I think will always be a useful means to acquire investments such as houses, belongings and for infrastructure providing such credit is based upon sensible repayments reasonably identifiable as future savings.
Modern day economies have become much more complicated in their dealings with the rest of the world but any nation’s credit standing and rating will always be reflective of its underlying ability to repay its debts and have regard to its sustainability.
In a complicated world I think there is also a tendency for unfounded fear. One such aspect concerns derivatives. Financial derivatives do not represent credit and financial writers have given the impression of looming trillion dollar liabilities which threaten to bankrupt the entire economies of the world. What is not always understood is that this is a zero sum game so that if every transaction was simultaneously collapsed, the net effect is zero. E.g. Losers cancel out those who gained. Any leveraging of these positions by credit will simply multiply their effects. In that case lenders, should they be foolish enough to lend without security in such speculative ventures could experience losses given a bad bet. It is estimated derivatives only represent about 3% of the worlds total transactional values.
Banks and intermediaries should not be involved in such speculative activity, (which represent no more than a sophisticated form of gambling) but rather it’s activities should be confined to the legitimate role to be played in hedging. An example is to purchase currency in advance to ensure a known outcome for its clients for a given premium, akin to an insurance policy in which the bank and its client are not subject to any risk.
In the western world the past decade (what was also evident in periods before) has seen an increase in the real prices of real estate by up to 120% which presided over a period of love for credit as householders leveraged that increased equity in their homes by borrowing for both current consumption and investment. Lending institutions became less concerned about the ability of borrowers to repay their loan, whether it is housing, consumer or commercially related. The idea you should have sufficient deposit to support any loan application and have demonstrated a prior saving ability sufficient to reasonably repay the loan has almost disappeared from view. It is also contended that had their been no subprime lending in the US, (with latest estimated losses of $500 billion) other losses in different areas are now likely to exceed this figure. The sub prime lending was one large mountain on a mountainous range.
Consequently western countries during this decade have collectively reduced their savings to zero and in some cases it has become negative. Worse still some counties have continued to operate their government sectors under massive deficits, spending more than they receive in government taxes and revenue from their citizens and institutions , further exasperating the lack of savings. The other side of the coin is represented by creditor nations who have lent the money to finance this unsustainable spending, particularly from India, China and the oil rich economies.
Savings are not only important in terms of money but also in relation to our materials and resources. Western nations have also been the greatest users and denuders of natural resources, to the extent we are unsustainable and we give a very poor example to the developing nations. Progress in the future will depend upon the ability of western countries to engender a greater saving philosophy and sustainability. Our developing neighbors are much more likely to follow suite by way of good example.
One Proposal I think that has merit is the idea of setting up a National Climate Changer savings Scheme. Instead of paying higher interest rates on loans by borrowers it proposes a deduction from taxable income remitted to this national savings fund. The fund would be available to make repayments back to those individuals when they are able to present future investments in any energy infrastructure that can be demonstrated to result in carbon abatement.
If you’re interested in the full scheme particulars click here