Paraphrasing Paul Krugman, this one is a “wonkish” post.
Let’s start with Savings. A saving is the amount of your income that is both not taxed neither consumed.Basic theory (and common sense) will say that if the interest paid on savings increase, so will your “appetite” for saving.
Based on this mechanism, and due to excessive global savings (either it be Secular Stagnation, Savings Glut, Debt Overhang, Balance Sheet Recession or other explanation: I’ll talk about that soon) Central Banks all over the developed world have been decreasing interest rates (with exception of the Federal Reserve nowadays).
So they are trying to decrease Savings. (Or try to incentive consumption, or investment or even government spending, or even exports by currency depreciation, nevermind…)
And now another idea, that isn’t usually connected: the Giffen good. A Giffen good is a “rare bird”, it is a good which consumption increases when its price increase. Can you think of any such case? (Have you been sleeping in your Economics 101 lesson?)
If we combine both ideas, we will have: savings increase when interest rates decrease (the Giffen case). Does it make sense?
Let’s imagine that I am saving money so I can buy a car next year (12 months from now). The car is 12000€.
If the interest rate is 2%, I will have to save 991€ each month (trust me I did the math..).
If the interest rate falls to 0%, I will have obviously to save 1000€ a month. (I wish I could..)
Interest rate falls»»»Savings Increase! Success: Giffen
So in my little model it makes sense…What about real life??
In a country with no Social Security or any safety net whatsoever, people will have to save more with low interest for the future and/or rainy days. In those cases this makes sense.
I guess americans should shout out loud in these elections:
DONT MAKE MY SAVINGS A GIFFEN!