Our time of life affects they way we use our money – whether we are looking to borrow or whether we are looking to save, whether we want a safe investment with a guaranteed return, or whether we want to take a risk. As we all know, there are currently a lot more elderly people in the world than ever before.
When elderly people save more money without investing it in businesses or infrastructure it affects our economy. Spending falls and interest rates also fall because banks don’t need high interest rates to attract savers, but do want to encourage lending. When more people save, more money is available to lend, so the ‘price’ of money drops.
The ‘global savings glut theory’ works like this:
– Ageing savers become more conservative as they get closer to retirement. That means they’re more likely to put their savings into a bank than into a risky start-up company or new venture.
– When more income goes to the very wealthy they struggle to spend it all and they put it into banks and other low-risk assets, such as property and bonds (this happens when there is a bigger gap between rich and poor).
– Third, the world’s biggest corporates are sitting on enormous cash piles because they don’t have to invest much to grow their businesses due to the low price of technology.
For banks that don’t need to borrow so much from overseas to fund their lending it is good news. It makes our banks safer and more profitable. However, the savings glut has also helped to increase the price of ‘safe’ assets such as property investment and pushed interest rates lower.
This means that in places like New Zealand its becoming harder and harder for families to afford to buy a house. Property prices and the prices of shares that produce regular and high dividends are at record highs because more conservative elderly savers want these types of assets and banks are keen to lend their ample deposits to help people buy them. Does this effectively mean that the ageing baby boomers will be pricing young people out of the ‘safe’ investment market and home ownership for years to come?
Like all of economics, the ‘global savings glut theory’ is just one theory – albeit one highly regarded by many economists. In any case the global ageing population and skewed population pyramid isn’t going away anytime soon. We can expect to see this unprecedented demographic spread influencing the economy for years to come, and it is worth considering the effect it will have on people’s lives.