Countries, Companies Borrowing Money, simple science

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I write this to explain to a work colleague about the perils if everyone, in a particular country, started saving to avoid recession. I have calculated that it will not work. However the guy has a business deploma and he sure sound more intelligent then me. NTs have it easy 


I wan to prove countries that are more conservative with borrowing naturally cannot compete with those who borrow big time.

I will give you an example if a retail company started business
And want to purchase some I-Pods from a wholesaler. As with all wholesalers the more you purchase in bulk, the bigger discount you get.

1) 30 Ipods for £130 each, totalling £3,900
2) 60 Ipods for £120 from a bulk £7,200
3) 100 ipods for £100 each, totalling £10,000
4) etc..
5) etc..

Company A ,B and C

Company A decides start a business to keep debts under control and take out a loan small for £3,900 to purchase 30 Ipods to sell, company B take out a loan £7,200, and Company C take out the most expansive loan of £10,000.

Company C is able to sell its Ipods much cheaper then Company B and C. As a result, no customer want to purchase goods from company A and B. Resulting in Companies A and B going bust, choosing another line of business or taking out a bigger loan to buy more bulk then company C.

It is like an arms race, where more borrowing = more profit. Or if I choose different words to explain, lack of borrowing > lack of investment > a non competitive company.

The reason why I wasn’t happy about accepting that UK in the past was much better at saving, so we should go back to modelling old ways. That would not be very practical because UK in the old days did not have to compete against other counties that borrowed extortionate amounts of money for investing. If we did practice taking out smaller loans we would end up like company A and B.

Imagine if everyone suddenly decided they all need to save money, or forced to do so by a recession. They would travel by walking, so car companies would go bust because they couldn’t sell any cars. They wouldn’t buy luxury electronic goods so those companies wouldn’t be able to survive. When those people from those companies get redundant they to have to save money exactly the same way creating a vicious circle.

Well, I would argue your argument from sudden saving is somewhat questionable. Borrowing comes from saving, and thus more saving just makes borrowing easier.

The notion of an arms race with an inevitable crash makes me think of Minsky's model for the economy. What he sees is slightly different, basically, everyone keeps on making riskier investments until at one point the system starts collapsing. Then people avoid risky investments for awhile, but the tolerance to them builds up, and it just keeps on going and going.

I agree that panic hoarding can be disruptive - whether of pennies, flour, or currency. We had irrational exuberance when things were going good, and irrational dismay could be setting in now, which intensifies the downturn. Or it may be completely rational dismay; I'm not sure.

The argument assumes that people can either save or spend, but not both. Certainly, if people stopped spending money altogether the economy would collapse. That isn't going to happen. If people spend everything they earn without saving anything, then all of the banks and businesses that rely on people's savings would go bust. If everyone in the country decided to save 10% of their income consistently, the economy would benefit greatly. Nobody will go out of business just because their customers are saving some of their money, because people will still buy what they need. The companies that will suffer in such a scenario are the ones selling things we can live without. Car companies will survive, but the companies that make fancy rims might not.

So an avarege person should have saving as well as dept. So how would a person who has £50,000 dept and £10,000 different from someone with no saving but £40,000. It wouldn't be logical for anyone with dept whether it is a bank loan or a mortgage to have saving, other then a way of organizing money and improving moral. An extreme example of this idiocy is for take out a loan on a credit card to put into a low interest savings account.




The problem is when they are saving, they are not spending. Saving is synonymous with an anti-fiscal stimulus.

Buying stuff we don't need is what capitalism is all about. I, as a single person wouldn't need more then to rent a room ,buy a TV, Playstation, a bar of soap and a cheep, used, Japanese minivan that is so reliable that it will never breakdown, so I would never need a new car until the year 2020.

My workmate told me without savings the bank cannot do business; however, If someone had £50 dept but £25 savings. Would that £25 savings be any good to the bank because in real turns, he has a £25 dept.

Sounds like a really crazy system to me.

Hard to prove: Countries with a traditional prudent fiscal policy, like the Netherlands, Luxembourg, Germany or Switzerland, did normally better than countries with a high deficit spending. Especially now countries with a "loose" policy, like Greece, Belgium, Spain have huge difficulties to borrow more money for reasonable interest.



This is highly simplified: Retailers are also not a good example, because their capital is mostly short-term capital. Within the backbone of any industrial economy, the manufacturing sector, the situation is different. Capital is mostly a medium term (up to five years) or long term investment. Raising capital on credit will produce a cash drain for the interests.

An other problem is surviving recessions. If the company's equity is sound and no interest had to be paid than a company can much better survive a recession.



The investment had primary to get out of the cash capital a company had accumulated and primary out of borrowing, otherwise the interest will lower the profit. Also: On the level of a economy it had to seen that the money to be turned into capital via borrowing had to come anywhere from.



How shall borrow those moneys? If the UK borrows further in this range, the only way to "repay" the deficit is to "print" money. This would led to a devaluation of the currency.

The current problem is caused by an inflation of assets. Money had be cut back - so the governments shall bring with most importance their budgets again into surplus (higher taxes and lower spending).



This recession would only reflect the real state of the economy - it would be not a problem, but highly needed correction of the market disturbances caused by cheap money in the past.

The currencies had to stabilized, the interest on reasonable level (better to high than to low). The central bank shall not issue money for bad assets and banks, if they are in negative equity shall go bust. False equities shall be eliminated - the current crisis has more to do with bubble in 1720 in France than with the Great Depression in 1929.

Well, the counter-argument is that these levels of debt are not good for the economy or even their own interests. Because of that, one can argue that a person should not really have much debt at all, and have all debts be temporary and inconsequential in relationship to savings rate.

Let me ask you this: if *everyone* has 50,000 money units worth of debt, then where does the money to borrow for this debt come from? Someone's gotta be saving something for this money to exist, as even corporations are based upon investments(savings).


Ok, you can make the argument that spending is more stimulating in a Keynesian sense than saving, however, this does not mean that an economy will necessarily do worse with less spending and more saving. The modern Keynesian argument usually assumes that stimulus is just for short run changes to prevent recessions, not that it is always necessary.

Capitalism is about sating wants. If your distribution of income changes, then the distribution of production changes. Instead of more goods going towards basic consumption, you might start focusing on better food, more reading material, etc. Because, let's face it, saving for no apparent reason isn't realistic, as most people save for their use. In any case, saving in a financial institution merely allows for the consumption by other groups, the more you save, the cheaper debt is to hold, and the more of it that these groups can have, and this debt can be used to create capital and allow for growth through that. In either case, I would not put saving and consumption completely against each other, for a working economy would need both.

Thanks Awesomelyglorious and everyone else.

Saving does seem to be logical to an economy, but something doesn’t seem right, despite my lack of money knowledge.

Savings for person with more dept seem like shifting around money without making a difference. If individual, don’t save why doesn’t the state save on our behalf, via a tax, and put it in a bank to invest so the banks have more lending power.

I am trying to make sense of this site
http://www.creditloan.com/blog/american ... countries/

Yeah, I am wondering how the figure is determined. Like, Britain has an external debt of 4 times it's GDP. Who's funding that? I would have to see how they get the figures, because there must be a source of the debt, and so I do not think it could be net debt, but perhaps a snapshot including short-term debt and purchased houses and other conventional forms of debt that do not interfere with the goodness of saving.

Watch this movie. It's a real eye-opener.

The external debt is an important factor, but it had to be counterweighted to external investments and assets. In the case of Germany the external debt is quite high but, because of decades of significant current account surplus, net Germany borrows the rest of the world.

According to this site UK is in a mess. The avarege brit is poorer then me, and I considered myself low status.