Page 10 - PowerPoint Presentation

> Governments – How they can destroy your savings

We allocate our resources in the most efficient way, to free up our time and focus on
research for even more efficient ways to allocate even more resources.

We employ intelligence, natural resources and technology in such a way that we can

produce more goods and services for ourselves in the present and for our children in the
future.

However, in practice, we see government intervention.

The market for loanable funds and a government deficit issue

“The market in which those who want to save, supply funds and those who want to borrow

to invest, demand funds “- is the loanable funds market.”

This is a supply and demand governed mechanism in which demand and supply interact to

determine the price of money - the interest rate.

Interest becomes the cost of borrowing for the investor and the return on saving for the

saver.

Obviously, if the market is over-supplied with funds, the interest rate will drop; an under-
supplied market will drive interest rates up.

If people save more, there are more funds to be invested at lower rate. Great!
These markets are rarely left to their own devices and governments try to manage the GDP

equation. Generally, it has to be said, politics, self-preservation, poor judgement and blunt

tools conspire to make such management difficult to get a good outcome from.

For example; to try to stimulate savings and investment in the economy, the government

may impose an array of incentives and disincentives, such as tax reliefs and levies to try to

change consumer behaviour.

Under one such “incentive”, that tries to increase household saving, governments introduce

tax reliefs on the bond purchases. The idea being to increase the potential return form

bonds over time to encourage more saving and more lending to government. Some argue
that this merely continues the pattern of endless deficits.

More equipment is working, more jobs are being created, more goods and services are
being produced. Great!

Attempting to stimulate another part of the equation, demand, governments introduce

“investment tax credits”. Under these, businesses get tax advantages if they borrow money

and invest. Of course, the result is that demand for money increases and the price of money,
interest rates, goes up reducing the stimulation effect.

The investment tax credit is supposed to offset any additional interest cost of borrowing
giving a positive effect in economic expansion.

The problem with this is;