Forced saving (1912)

Given its current name by Austrian economist Ludwig von Mises (1881-1973), forced saving refers to an an involuntary reduction in consumption which arises when an economy is in full employment and when it has an excess supply of loans.

The excess depresses the market rate of interest and stimulates demand for investment finance which precipitates general inflation.

As prices rise, those with fixed incomes consume less and savings are ‘forced’ out of them. This additional saving finances the extra investment.

English economist John Maynard Keynes (1883-1946) recommended compulsory saving as part of a tough fiscal policy for financing World War II and avoiding inflation. Forced saving was first outlined in 1804 by English economists HENRY THORNTON (1760-1815) and Jeremy Bentham (1748-1832) under the term ‘forced frugality’.

Also see: paradox of thrift, loanable funds theory of the rate of interest, life-cycle hypothesis, relative income hypothesis

Source:
L von Mises, Theory of Money and Credit (London, 1934);
J M Keynes, How to Pay for the War (London, 1940)

Examples

Example of the first mentioned situation could be forced savings of households caused by massive consumer goods shortages in Russia during 1991. Net forced saving ratio of households during year 1988 was estimated around more than 40%.

The other situation could be rising costs of real estates and mortgages. Because of mortgage market regulations one does have to possess enough savings in order to apply for mortgage which leads to long term forced savings for many households amongst all Europe.

Forced saving ratio

We can define forced saving ratio which measures how much of household savings is composed by forced savings.

“net” forced saving ratio = (shortage effect + demand spillover effect)/savings rate

“gross” forced saving ratio = shortage effect/savings rate

Net forced savings ratio considers that informal economy role under shortage conditions.

Consequences

Forced saving results in many faults and consequences. Two main problems can be distributional effects, and also recessions.

• Distributional Effects

Forced savings encounters problems with distribution effects as it can result in uncertainty in who receives the money that is entering the economy, and also unease about who will receive more purchasing power and who does not.

•Recessions

The problem of having a recession can occur through forced savings through the use of investment. Some investments can result in being funded from the ‘forced’ savings which can cause problems. Over time, these investments will be seen to be errors and the liquidation process that occurs is what will in turn lead to a recession and a boom bust period cycle.