Page 9 - PowerPoint Presentation

> Governments – How they can destroy your savings

Lets model savings and investment in a simplified, closed economy. In this simple model, we
assume no international trade. GDP would therefore be calculated as if our economy did not

do business with any other countries, therefore we have no exports or imports, GDP

equation would be;

Y= C + I + G

Where; Y = GDP, C =Consumption, I = investment and G = Government expenditure

We can move this equation around and come up with interesting results. Expanding the

equation and using substitution, the following deductions can be made;

Public saving

All the monies government takes in taxes minus all expenditure, including unpopular, with

the public, expenses such as;

• A Minister’s taxi ride between Heathrow terminals,

• De-leveraging national banks

• Participation in IMF bailout
• Gardeners’ salaries in hospitals with no gardens,

• An army of public servants

Also, good expenditure, such as actual investments including in infrastructure projects such
as new roads.

Whatever is left in the government coffers after these expenses is referred to as ‘national

saving’ and it is expressed by;

T – G Where; T = Tax revenue and G = Government expenditure.

National saving

By implication national saving can therefore also be expressed as;

Y = C – G

All of the money left in the economy, after consumption and government expenditure “S”,

can then be expressed as

S = Y – C – G Where: S = Total savings in the economy, Y = Total GDP in the economy, C =

Consumption spending and G = Government spending.

The amount “S” in our capitalist system will seek the highest yields possible on investments.
The money accumulated from savers is therefore passed, via financial institutions, to

investors willing to take a risk and put the money to work.

It is all good and makes a lot of sense.

We under consume in order to save and use the excess money to invest in our own future so

we can enjoy our returns later.