Regular readers will know that I like to ream off, every now and then, all the areas of Irish life which are in crisis: We have a housing crisis. We have a hospital bed crisis. We arguably have a law and order crisis. We have a shortage of Gardai, and teachers, and nurses, and school places. Electricity bills are skyrocketing and hotels now seem to cost, for one night, roughly the equivalent of two weeks in the canary islands.
But for all that, says economist Dan O’Brien, there’s a whole lot of money sloshing around in personal savings:
Irish households have almost €150 billion sitting in bank accounts (an average of €30,000 per person). Deposits continue to grow rapidly, suggesting that the inflation squeeze on incomes is manageable for lots of people. pic.twitter.com/X2Ec9HYxxr
— Dan O'Brien (@danobrien20) November 30, 2022
If you look at the graph, “overnight deposits” in blue are the most common kind of savings. They’re also by definition the least “savings” kind of savings. All an overnight deposit is is… money in your current account. You can spend it tomorrow. Is that really savings? It seems more like money which has piled up, for some reason.
The maroon section is “redeemable at notice”. That’s the kind of savings where you draft the bank in to help you, by making your own money inaccessible to you in case you’re tempted by an impulse purchase: You need to give them a few days notice before making a withdrawal. That’s more of a serious attempt at saving money, you’d have thought. And yet, that kind of saving is relatively flat. All of this suggests that Irish people aren’t consciously saving at higher rates from before, they just have more money, or they have same amount of money but are spending less.
Still, that’s not to take away from O’Brien’s point. A lot of Irish people have a lot of money, sitting around in bank accounts, unspent.
Some of that is unsurprising: Look at the massive expansion since 2020. We know what caused that: It’s easy to have money pile up in your bank account when you’re not allowed to spend it in pubs, or restaurants, or shops, or at Christmas Parties, or weddings, or whatever else was banned during lockdown.
One way of looking at that money is that it’s not savings at all: It’s a visual representation of the cost to the economy of covid. That’s all the money that wasn’t spent. It’s the money local businesses lost in lockdown. It’s the money that should be circulating through the economy in wages, and taxes, and public spending. It’s the money the Government has had to borrow to pay for the cost of lockdown, because instead of being spent and taxed, it was all horded by people with nowhere to spend it.
And how much is that?
Well, since 2020, savings in Irish bank accounts have exploded by about €30billion. The Government estimates the cost to the economy of all covid measures at about…… 30 billion. There’s no coincidence, there, I think.
It’s not all bad news, of course. O’Brien is correct that it means that families – many families, not all – have a cushion to aid them during the present economic turbulence.
It also means that, at some point in the future when people feel good about spending again, a lot of that money will be surged back into the economy, creating growth, demand, and jobs.
The problem, it seems to me, is that those conditions don’t exist right now. Most people seem to feel with prices as they are, that it is a bad time to make major purchases, and that there’s not great value to be had in the market. Add that reticence to spend to the impact of lockdown, and there’s a lot of money hording going on.
Overall, savings should be seen for what they are: A lack of confidence in the economy, and in the future. If you are saving for the rainy day, you probably feel like there’s a high chance one will come. That is personally prudent – and to be praised – but the problem is that when everyone feels like that, and starves the economy of money, you get a recession.
In other words, people create the very rainy day they’re saving for. It’s a very old problem, and not an easy one to solve.