When Risk Aversion Becomes an Economic Problem

[kingstep]

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

[Dr.Bitcoin_Strange]

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

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.

In a situation like that, those large number of people are not removing money from the economy but transferring it to a future productivity, yes it might not show immediately but will, that's why I said earlier that such habits by a lot of people will not completely create chaos.

When business faces weak demand due to reduce spending and increase savings by household, you know the business are not the only one being affected, the business or company can drop some workers, and then assuming these workers are going to be sitting at home for some weeks or months without getting another job, they will still end up spending the money they must have saved or will end up taking credits. If a lot of peoples job are affected due to this situation, savings so much becomes impossible.

There's inequality in the society, it's mostly the rich that are able to save much and have more income from even different sources and still transfer the money into the economy for a future productivity, while the poor and middle class are struggling to save, no matter how some of them cut down on spending, the high cost of things still makes it hard to even get enough to spend.

[tiCeR]

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

What you are describing is the economic state of stagflation, which is actually the worst-case scenario for an economy. You have incentives that should actually cancel each other out and lead the economy back towards a normal or positive state, depending on what dominates, but in times of stagflation you have rising living cost or inflation in general for many essential products, stagnant (stag...) economic growth or even worse a shrinking economy, and that gives people a reason to hold their money back when it would be best for the money to be deployed to foster economic growth.

If a consumer decides to spend the money or invest the money while the economy is shrinking, the risk to have negative ROI is exponentially higher than during better times. It's a trap and what you could call collective carefulness is probably more about collective desperation and uncertainty, which then translates into the economy getting even more stuck.

[ruykeri]

People adopt various ways for their financial security in the future. In this case, some give more priority to investment, while many consider savings more important. 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. This is basically their personal problem. The weak economy also plays a significant negative role behind this. In some countries, any kind of small business can be done from savings and where there is a possibility of profit. But there are many countries where many things have to be considered while doing business in all these countries. The economic infrastructure of the country is not good. As a result, it becomes more risky for any less experienced person to invest. In that case, they give more priority to saving. However, there is no need to think that if you save, that money will be locked forever. They are saving that money for the purpose of ensuring that the natural flow of the future is ok .

[Stepstowealth]

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 is a natural human action to want to spend less when the economy toughens just so that they can have something set aside for important needs. To actually encourage people to spend more you just need to make the economy more balanced and favorable that people have a lot of money that they can spend on not just needs but now luxuries as well.
In a favorable economy stimulated by the government, people will not just have enough to spend on luxuries they will still be able to save comfortably and have enough to invest as well, a flourishing economy will have citizens that have enough money to throw around.

[Hamza2424]

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

You have a good argument bro, too much saving can be a reason for the same people to save more because if people are earning money by selling cold drinks, but on the other hand someone says let's not drink cold drinks anymore this summer or winter, let's save that money and run a campaign in the area, and everyone starts saving money, eventually that seller will have to save more to survive, and whatever they don't buy will cause a loss in sales to someone else.

That's why too much saving is not a good thing, that's why it is being said don't hold your money, keep it in circulation. If you want to hold, don't hold it, hold any other commodity. Economics also says money or fiat is for payments only, not for holding.

[BlackHatCoiner]

Congratulations, you just discovered the boogeyman that makes Keynesian economists wake up in cold sweats!

God forbid peasants actually save their money instead of maxing out three credit cards on useless plastic junk just to keep the sacred GDP line pointing up, right?

To answer your question: the problem isn't that people are saving too much. The problem is that in the modern fiat circus, "productive investment" usually just means funneling cash into another massive real estate bubble or buying government bonds to fund someone else's deficit.

[Royal Cap]

The real problem here is where the savings go rather than the amount of savings, even if people keep money in the bank, if a large part of it does not go into productive businesses or new investments, then demand is not created in the economy.  A simple example is that if everyone stops buying new phones due to uncertainty and saves money, store sales will decrease and businesses will lose interest in opening new branches. So it is not just about getting people to spend more but also about making the savings go into good investments  and increasing people's confidence in the future, the balance is probably there.

[Fortify]

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

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

You give the example of China in its current state, but you must appreciate it's history to understand the mindset of it's people now. China being rich is still a relatively new thing and it did not come without a lot of sacrifice by generations before. The oldest people will still be able to remember living through some of the harshest periods of it's economic history, caused in large part because of poor economic policies by it's government. The fact that it has become so rich in recent decades was through brutal factory and resource extraction, so people would have wanted to keep any meagre amount in savings if it was even possible. Prior generations did not have access to anywhere near the quasi-capitalism available today. You cannot ignore or skip over history of what moulded people today, there is good reason they want to preserve and protect capital.

[davis196]

A nation having high levels of saving is a result of a specific economic culture, that was built for centuries. China and Japan have economic cultures, that encourage low spending and high levels of saving. The western world(especially the US) encourages spending and getting into consumer debt.
Saving more in times of high inflation is actually counterproductive. Every unit of your fiat currency is less valuable tomorrow than it is today, so spending those money now is better than saving them for tomorrow(assuming that those money are not invested and you just keep them in the bank or under your bed). Also inflation devalues fiat currencies, which means the borrowers and the people in debt are benefiting in times of high inflation. It's really difficult to change an economic and financial culture, that encourages low spending and high saving.

[Fiatless]

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

When the economy becomes uncertain, people will seek ways to protect their future due to fear of the unknown.

A free market economy shouldn't be driven by fear. If the reason why people are investing is because of fear, then the economy will be at a standstill. When the economy is bad, people will choose to invest their money in low-risk or safe-haven assets. Some high-performing economies are driven by private businesses, and that is why they produce the highest number of billionaires. People are not just investing in government bonds and shares in these countries; they are starting businesses. So I would say that the economy suffers when money is not going into productive sectors. Starting businesses, not just investing in government debt, improves the economy.

China is fortunate because they are balancing its economy with exports. Even when Chinese are not spending much, the country is expanding its trade partnerships and market. China's industries are not shutting down, irrespective of low local consumption, because there are foreign markets to sell products.

[Kelward]

Every economy needs an equilibrium balance where goods produced becomes equal with consumer demands, if this balance is not maintained it would affect the economy on an aggregate level of demand and supply so the government should always play their own parts by ensuring a stable economy. I think that the government has a major role to play inorder to encourage many people in their country to have the willingness to spend their money because if an economy has inflation that is where people would be looking for alternative means to save their money and invest it rather than spending it.

When people in an economy don't have a zeal to spend their money it would affect manufacturing, so government must provide an enabling environment for industries to strive so that production would be cheaper and affordable to the people. Every country needs good and proactive leaders that can have progressive policies that would favor producers and consumers which will drive economic growth.

[AmaGold70]

In a situation when an economy is engulfed with inflation, various individuals, and business people alike look for safe ways of keeping their money, in the cause of this, they invest their money into other assets like bitcoin, stock, gold etc to retain value of their money, and increase profit with time, and some will also put their money in a more stable currency like dollar ($) depending on the nature of your fiat currency or save in USDT . But while saving money in a more safe platform, there is no way you can invest or save all your money, only money you cannot use for long time can be saved, and money to run your daily business, and handling your immediate needs has to be there for you to be able to survive even in the harsh economy.

[Primark]

Maybe people save more when there is high inflation. But to me the main issue is where that saved money ends up. In general, it is a good idea to cut back on spending during times of uncertainty. Especially if you are unsure about whether you will have a job, whether your home value will fall, or where your future medical or retirement expenses will come from, it is certainly logical to cut back. But when we look at it another way, we see that if everyone behaves like this, business sales will decrease, and the need for new investment may also decrease. That is why it is not so simple to say that just going to the savings bank will be a productive investment. And the example you gave of China is quite interesting. Because according to their calculations, about half of household savings are related to housing and about a quarter are in bank deposits. But even though huge deposits are a source of financing, this capital distribution does not always go to places that increase productivity.

[Alpha Marine]

It doesn't work like that. People spend more when they have more and spend less when they have less. Inflation does not make people save more, it makes them have less money to spend, which forces them to cut down on their expenses. The reason the economy suffers in an inflation is because there is no money to spend, or even if there is money, it has depreciated in value, not because people save their money instead of spending it.

Based on human nature, we would always spend more when we make more. People wil move to bettee neigborhood, get better cars and clothes, go to better schools, eat better food, get better health care when they can afford more. When the situation is reversed, they do the opposite to fit their fianancial situation. The spend less, and even save less. It's basic econmics.

[Rockstarguy]

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?

When there is an economic crisis, most people have the sense to manage the money they have, as they become very conscious of spending money just to save for the rainy days, and this is what makes money become scarce.

The funny thing is that the money you plan to save ends up losing value, so if you are wondering where all the money that people are saving is, you could say inflation has a significant effect on it. During inflation, it is not advisable to save money for a long time; it is better to save up some amount and quickly invest it in good, valuable assets.

[Taricoins]

If it's inflation, I don't think it's the fault of the consumer to preserve the use of money because of how deprived there purchasing powers has been but if you are talking about the economic problem where alot of the masses especially business refuses to take loans to invest in there business because of the hoarding of money or the less spending on the side of the consumer, that's when it becomes a macro-economic problem and policies should be put in place to curb that problem.

[Negotiation]

The primary effect of inflation is that people's living costs increase. When the prices of goods increase but income remains the same, most of the money goes to meet daily needs. As a result, people do not have money left over for additional spending or savings, which forces them to reduce their basic purchases and standard of living.

The problem is not whether people are saving more or not, but whether policymakers are able to provide people with an economic environment where they can comfortably consume and invest money without fear of the future.

[Conqueror777]

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

There are 2 types of rats in the rat race; the spending ones which spend in order to satisfy themselves psychologically and their money evaporates in a very small period of time. The other type is the investing ones. What little they have they put it to investments like stocks with dividends etc in order to live well when they retire. Both of them are slaves to money. In order to put yourself out of the rat race you need a specialized skill set that pays you 10x than the national medium of your current country and when you have done this you can reinvest the surplus and become financially free in a relative short period of time (5-10 years). I haven't done it myself, meaning I'm not completely financially free, however, for my country I am doing very well. The balance in my opinion is to treat yourself as a business and learn specialized skills continuously therefore upgrading your exchange of time for money so much that you are paid 5-10 times more than the national average of your country.

[MArsland]

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

The balance lies in government policies to be more aware of people's income and purchasing power. What China is doing cannot necessarily be implemented in some other countries, especially developing countries. Because its economic structure is still developing gradually. Certainty to provide welfare where every citizen gets a decent income.

In the economy there is such a thing as interdependence, when a product needs a consumer, while the consumer's income condition does not improve, automatically instead of them better spending tends to hold back spending to still ensure that needs are met over the next few months.