MacroScope

Trichet says spend, spend, spend

February 5, 2009

The financial crisis is causing people to do some funny things, but when the head of one of the world’s biggest central banks looks down the lens and tells people to stop being so cautious and go and spend, spend, spend, you know something strange is going on.

Despite European high street stores offering up to 90 percent off, rattled Euro consumers have reacted to the financial crisis by slamming the brakes on spending.

It is not exactly an irrational response. Jobs are being slashed at an eye-watering rate and savvy shoppers know that, as stores become ever more desperate, there is a good chance the
must-have jeans, gadget or new car they have been eyeing may be even cheaper in a few weeks.

So Jean-Claude Trichet, the head of the European Central Bank, decided to take it upon himself at the latest ECB news conference to try a bit of French sales patter after the bank kept interest rates at 2 percent but signalled further cutting was on the way.

“Households are saving more than we would suggest, especially in a number of countries where savings are particularly high,” he said. Rough translation – stop hoarding your money and go to the shops and spend some money so we can get the economy going again.

The evidence is pretty clear cut. Official data showed that Euro zone household savings rose to 14.4 percent in the third quarter of last year, the highest in four years.

It is what is known in economists jargon as the ‘paradox of thrift’ a term coined by Britain economist John Maynard Keynes to explain the fact that people saving more in bad terms only adds to the problem by further sapping demand.

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