When Risk Aversion Becomes an Economic Problem

[Joeboy]

Every one is very much uncertain of the future and can you really blame them? Coz they actually have every right to be considering how unpredictable life could be plus how harsh the economy is becoming... And the more that folks save, the more businesses weakens because majority of businesses depends on its customers more continued operations... Without buying taking place, some folks may also experience job loss, since those affected businesses will then become very cautious about hiring more personnel due to lower demands... Even some nations depends on the operations of a company to actually generate revenue... But when this businesses aren't operating as they normally would, the country may not be getting the level of revenue they are supposed to...

This is just like a cycle because we can see that one very move from an individual can actually have varying degree of effects on millions of people as well as even the country.... And just like you proposed OP, the solution to all this may not even be to spend more because spending too much may even make currency to lose more value because of too much cash out there in circulation...The better solution would be to invest these money instead of just dumping it in  your back account... Meaning that this money can very well be channelled into the creation of businesses, as well as other productive activities which can very well help the individual while also helping others in ensuring that there are enough jobs in the society and this could very well help boost the country's economy at large.
In a nut shell, the effective solution is investment..

[Spaceman1000$]

I've been thinking about something I've noticed in a few economies lately.

When inflation is high and the future feels uncertain, becoming more careful with money seems like the obvious thing to do. People cut unnecessary spending, hold onto more of their income and look for better ways to preserve or invest their wealth. That's sensible at an individual level. But what happens when a large part of the population starts doing the same thing?

China seems to be a good example at the moment, with household consumption remaining relatively weak despite continued investment and strong exports. It makes me wonder whether there is a point where this kind of caution can become a problem for the wider economy. Savings can eventually become investment and productive capital, but that doesn't happen automatically. If people become too defensive with their money, businesses may face weaker demand and become less willing to expand.

At the same time, encouraging people to spend more isn't necessarily the answer, especially when that spending is driven by debt. So where is the balance? Is the problem really that people are saving too much, or that too much of those savings aren't finding their way into productive investment

It's not possible that everybody will do the same thing, obviously they all will invest, but in different dimensions, everybody most not invest in one product. The China you made mention of, if you check properly, there are people who are into manufacturing, some are into exportation, some are into mechanize Farming, others are in various productions activities, and they've been doing well with that.
I don't know much about China household consumption being weak, besides you didn't put any references or benchmark to ascertain your claims, so we cannot just agree on that, but to the best of my knowledge, those guys have been doing well in managing their economy coupled with overblown population.

When inflation is high, it directly affects the pockets of the citizens, so what majority do is save for consumption and not for investment, at individual level, citizens always struggle to save for investment, except maybe you take a loan, however the only people saddled with the responsibility to fight high inflation is the government, hence they do that by supporting SMEs with loans and grants, you will begin to see businesses expanding. Another way the government can help in fighting inflation, is to help subsidize the energy sector for citizens, that way, people pay less for energy they consume and can use the rest of the money for other things.

[TheUltraElite]

Spending fueled by debt sounds the type of economical problem that credit card companies wanted to create, nothing to do about that from our side because its human nature and simply one person not going into debt does not solve the entire problem.

Spending and saving need to be done with the income in mind. Daily spending and necessary spending is always going to be there but beyond that spending needs to be kept limited. Need is important, whether something new is needed or not to determine about the buying habit.

There is nothing bad about saving>spending when inflation hits, people have to be careful and the more careful they are the better.

[DiMarxist]

It's only natural that people should save more and spend less, especially when the economy is not doing too well and the minimum wage of a country is no longer sufficient for the daily living of the ordinary citizens. People become more cautious and acts more on the defense line by delebrately making sure that they don't spend much again.

I think that for countries like China which was used as an example, which is basically an export based economy and which focus has been basically investing into science and technology, I don't think that holding more money than spending will actually be a problem to their economy on the long run. I don't see that happening to the Chinese economy because of the way China open.

For an individual to be balanced, then that person most save more than what he spends this is basic economy. For a country like Chinese that gets foreign investment all over the world, I don't see this as a problem.

[tiCeR]

It's only natural that people should save more and spend less, especially when the economy is not doing too well and the minimum wage of a country is no longer sufficient for the daily living of the ordinary citizens. People become more cautious and acts more on the defense line by delebrately making sure that they don't spend much again.

I think that for countries like China which was used as an example, which is basically an export based economy and which focus has been basically investing into science and technology, I don't think that holding more money than spending will actually be a problem to their economy on the long run. I don't see that happening to the Chinese economy because of the way China open.

For an individual to be balanced, then that person most save more than what he spends this is basic economy. For a country like Chinese that gets foreign investment all over the world, I don't see this as a problem.

You don't get the full picture behind stagnation. All consumer actions aren't really deliberate or rational, they are the result of a trap and people have no real smart choice. Private investment into a shrinking economy can backfire badly whereas saving in a shrinking economy can backfire even worse, but the problem is the lack of sufficiently coordinated collective action. If investment was the right thing to do to get the economy going again, many people would ask themselves why they should deploy their capital at higher risk first, hence the wait for someone else to make the first steps. That is why governments try to intervene and send out signals that spending or investing is the appropriate action, but government actions are limited, too. If they can't convince their population because of former misconduct or hurting trust in the past, attempts to stimulate the economy can be completely ineffective.

You can see states like this right now around the world. It is not the perfect storm yet, but you have some markers that do indicate that the right ingredients for a serious stagnation period are there.

[Josefjix]

The problem is that, savings no longer safe again after a long while, and savings no longer build business too any longer. When were little, an investor can use 2-3 years and then save for investment where the plan will be done without obstruction or economic destruction on the amount saved. Nowadays, you only build business with the amount that comes in big at once because savings no longer does it anymore.

[kingstep]

And if someone wants to invest in any sector in the future, he may still need a very large amount of money. At that time, their savings may come in handy. Again, many people do not have the mental capacity to invest and the ability to take risks. In their case, it is not possible to use it from savings for productive investment

The concern is that we seems to be paying too much attention to the future at the negligence of the present. instead of spending for the now, we have become a people that mostly focus on saving for the rainy days, saving for the sake of the returns we stand to get in the future and in the best of case possible invest into an asset that seams to have positive potential in the future. while we all plan for the future, we might be killing the present realities and it certainly has a direct consequence on channels that are supposed to benefit from us if we focused a bit on the present reality rather than being too concentrated on preparing for the future.

[WillyAp]

The concern is that we seems to be paying too much attention to the future at the negligence of the present

That is very true in elderly societies. Fear od missing out (FOMO) is absent in elder people.
Moreso they push all new modern things towards their youngsters. 

[maydna]

If people cut unnecessary spending, hold their income, look for better ways to preserve or even invests their wealth, they only wants to prepare their future. That is normal in the hard situations and makes people want to have better future. They willing to do the hard thing as now than getting hard in the future where they will not survive easily.

We should remember that from all people in the world, perhaps not many of them that cut unnecessary spending and saving their money, probably only small percentage compare to all people. The economy will still running although that could shaking because people don't buy massively as before. People aware of the hard situation that can happens in the future and they learned from the history so they don't want to get a hard situation. People become more selective only buy the important thing and not just spend money or wasting it without calculation.

[Myleschetty]

I've been thinking about something I've noticed in a few economies lately.

When inflation is high and the future feels uncertain, becoming more careful with money seems like the obvious thing to do. People cut unnecessary spending, hold onto more of their income and look for better ways to preserve or invest their wealth.

This is due to the fact that the best course of action when inflation is high and the future is uncertain is to manage our debt, optimize cash inflows by increasing our income, and safeguard our purchasing power, which inflation also aims to erode.

That's sensible at an individual level. But what happens when a large part of the population starts doing the same thing?

It depends on the percentage of the country's population that follows the process, but generally speaking, doing so will result in aggregate macroeconomic outcomes where a large number of people will improve the nation's inflation, unemployment, and national income.

China seems to be a good example at the moment, with household consumption remaining relatively weak despite continued investment and strong exports. It makes me wonder whether there is a point where this kind of caution can become a problem for the wider economy. Savings can eventually become investment and productive capital, but that doesn't happen automatically. If people become too defensive with their money, businesses may face weaker demand and become less willing to expand.

Yes, the Chinese did a fantastic job and followed their plan exactly, without taking any short cuts. This enables them to act appropriately at the appropriate moment.
An example last year or year before I read sometimes ago that they didn't print any Fiat currency.

At the same time, encouraging people to spend more isn't necessarily the answer, especially when that spending is driven by debt. So where is the balance? Is the problem really that people are saving too much, or that too much of those savings aren't finding their way into productive investment.

I believe your statement that "encouraging people to spend more isn't necessarily the answer, especially when that spending is driven by debt". already answers your question. People's savings will also become debt if they are invested in unproductive ventures.

[justdimin]

The problem is that, savings no longer safe again after a long while, and savings no longer build business too any longer. When were little, an investor can use 2-3 years and then save for investment where the plan will be done without obstruction or economic destruction on the amount saved. Nowadays, you only build business with the amount that comes in big at once because savings no longer does it anymore.

You could still do that, but you can't "only" save; you also have to invest that at the same time as well. I do not care what you are investing in, as long as it is providing some good return; you could invest in Pokémon cards, all I care, I do not mind that, just gotta put it somewhere decent. Most people end up with mistakes because they end up with wrong moves, and for that reason they end up with something not that great at all.

If you only save and put that as a fiat on the side, and put it in a savings account and get like 3-4% a year from it, then you are going to get poorer. If you do that, then it is a bad idea, and you are not going to make a profit from it. A reasonable approach would be that if you do invest in what you have at any given moment, then you should be doing something a lot better. In that case, putting some aside and then buying bitcoin with it and doing it for many years would mean that you are going to get richer. If you do that and get as many bitcoins as you can and save aside, then of course eventually you are going to end up with enough money to retire as well.

[9ja Amaka]

Well, even if a large number from the whole population starts to save, invest and cut down in spending discretionary income, this won't completely create a choas in the economy, because these individuals that has started saving more and investing more of their income are going to look for secured investments where they will put that money in order to protect the purchasing power, right?  Those money they have saved is still going into the economy. For example, those household savings goes into banks or capital markets, banks lend to businesses and companies that wants to invest on a new thing and then factories, new technology and  job opportunities are created and all these will now lead to a higher future production still making the economy better.

Dr.Bitcoin_Strange and Kingstep, you are making an obvious error. Kingstep talked about becoming more careful with money through saving, investing, and reducing expenses. Well, investing should be excluded from the statement because investing has risk, which is not considered hoarding of money or wealth. Investment can be in business or be done in an asset, company, or government treasury. One way or another, through investment, the money goes back into society, and that won't affect the economy. 

In addition, basic needs have a minimum percentage below which we can go. We live according to our income. We may reduce the way we spend on unnecessary things, but for that which is vital to us, we can't reduce those expenses.

[Cryptomultiplier]

I can't blame the microeconomic situation of any country with citizens who are unwilling to spend but prefer to save money, because of the high probability of a future disaster that may leave them stranded and without any help from government in form of incentives or work to restore standard of living.
However, when every citizen does so much savings all at once, this is were the problem begins and it affects the broader macroeconomics of the country, because revenues would shrink considerably, there would be job cut, low productivity and even slow or no expansion of businesses, all because everyone saves more than they spend.

A liquidity trap is created thus, because of weak or low credit demands and higher savings rate from everyone which of course leads to a breakdown of the macro economy and systemic growth failure on a broader scale.

The solution in such a situation of risk aversion, should be for the government to try to improve a predictable economy for its citizens and make sure that the capital market can use excess funds to create value instead of to service international debt, drive productivity into the sectors of the local economy that it is most needed and improve credit efficiency for the citizens.