Free Custom «The Relationship between Savings and Investment» Essay Paper

Free Custom «The Relationship between Savings and Investment» Essay Paper

The Great Recession of 2008-09 and the global financial crisis became a nightmare to many Americans. During this period, the stocks value plunged, credit was unavailable to many people, mortgage foreclosures increased to its highest and the global economy went into a deep recession. These events made the United States government and concerned economists to ask themselves many questions on what went wrong, or whether it was avoidable. They had to gauge the future economy of the United States.  The recession became a wake up call for a necessary transition to a less free-spending but sustainable route for the economy. This brought about a shift from big spending to more of saving.

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Saving is the income that is not spent, or simply known as deferred consumption. It involves the reduction of expenditures. Private savings refers to the savings done by households and private businesses. It is equated to personal saving added to after tax corporate profits minus dividends that have been paid. Government savings on the other hand mostly include investments by the government and reduction on its expenditures. Individual saving refers to spending less on consumption than the available amount from the income of an individual or a company. It can be in many forms: bank deposits, a pension fund or buying a business. For one to gain in individual saving there needs to bea return on savings in the form of capital gain, interest, dividend or rent. Increased individual saving means a reduction in income to others. It will end up in a decrease in aggregate saving. Aggregate saving comes about when a nation gains real domestic assets such as new housing or new factories. This in essence refers to investment. It is the commitment of capital so as to purchase financial instruments or assets for the purpose of gaining profitable returns in terms of interest, dividend or an appreciation of the instrument’s value. Investment includes the choice of an organization, or an individual to place or lend money in assets that have a possibility of generating returns.  


Before the recession, most Americans were big spenders and did little to save. This meant that financing of domestic investment was minimal. Many people had jobs, and the economy was doing great. Americans kept enjoying the benefits of a prospering economy. The government, however, had to borrow from foreign sources to fund investment. The good thing with investment is that it leads to growth in aggregate wealth. However, without an increase in aggregate saving, investment is not possible. So investment is equated to aggregate saving, or better yet, aggregate saving is equal to investment. Policy makers should take caution and understand that eexcessive saving can damage the economy. They should be prepared to reduce any excesses if noted.

The saving rate has really increased within the recent past. People have reduced consumption so that they can increase their savings. The fact that most Americans say they enjoy saving than spending means that retailers need to plan as they look into the future. The collapse of the housing bubble became an eye opener. From 1995 to 2002, the prices of houses had outpaced inflation. Many had seen the increase in the prices of houses as an unsustainable bubble. The Federal Reserve and banks did not see it coming, or issue warnings on the housing bubble. The house bubble collapse has called for a change in policies. I am seeing new policies being introduced into the United States’ economy.


In conclusion, saving is good. Domestic saving will create a pool of money which will enable companies to borrow so as to invest in new plants or equipment. This in the long run will create more jobs and hence translate into better living conditions. Consumers will try to avoid threat of job losses and economic hardships. Americans now have to save more for their retirement. In the future I see the rate of saving going higher. This will reduce America’s need for foreign funds to finance its investment because domestic borrowing would have been made a possibility.


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