Loss triggered by savings, or wealth erosion

Population’s savings can be invested on the monetary or financial market. Lost in transition, people are fighting the risks involved by these investments and just as they believe they have made “a good deal,” the collapse of a bank or fund takes them by surprise. But it is the lack of confidence that stresses them out above anything else.

Romanians lose something every day. If we had the patience to talk to people, as journalists or politicians did, we would find out that many of them have lost their home, a relative or a friend, their fortune, their health etc.

Tomorrow’s incertitude, the miserable life led by pensioners, inflation, make them save a few financial resources for “hard times.” People are consumers, but also small investors.

Most of their savings can be invested on the monetary or financial market. Lost in transition, people are fighting the risks involved by these investments and just when they believe they have made “a good deal,” the collapse of another bank or fund takes them by surprise.

They entrust their savings to these market institutions, believing that people inside these institutions are concerned about how to manage and multiply the money for their benefit. And there are millions of such small investors.

When a “financial disaster” occurs, they are looking for those to be held responsible. Not accidentally, institutions that should have enforced “the rules of the game” and increase people’s confidence in the rule of law, such as the National Securities Commission, National Bank of Romania, Government, Parliament, etc were blamed one after the other.

The people “lost in transition” are living a big drama, because most of them have lost something in all these years of quasi-democracy and quasi-capitalism. But the money they lost represents a waste for the entire nation. First, a waste of resources for investments.

Second, a waste of wealth, as large amounts of unprocessed goods (logs, for instance) have been exported. Third, the waste of national production forces that, in the long run, is also triggered by lack of capital for investments.

They say saving is a virtue. And Romanians have an inclination toward saving, but those who rule the country undermine it, considering that the market solves everything. As gar as savings are concerned, the lack of safety is Romanians’ greatest enemy.

For instance, problems do not emerge from the fact that the value of money is falling, but from the impossibility to forecast the future value of money. A high, but stable inflation rate, on which everybody could rely, would trigger fewer problems than a lower, but less predictable inflation rate.

As the representatives of the Austrian economics school were pointing out, time preferences have a strong action in capitalism. Certain circumstances, often connected to incertitude, make the present goods more valuable than the future ones.

Current demand can be projected into future or future demand can be brought to the present. Not accidentally, the “don’t trade tangible things for a fake illusion” principle is often observed.

In the articles he published in “Timpul” in 1870, Romanian poet Mihai Eminescu emphasised the wisdom of proverbs teaching about the virtues of saving and warning on the consequences of wasting. In fact, the wisdom of proverbs illustrates the ethics and the prudent judgements of the Romanian people.

But there have always been wasters and there have always been theoreticians to justify their behaviour. The relation between savings and waste has influenced the evolutions of various countries on the road to capitalism. Money can be spent on luxury or on productive capital.

Great Britain became the world’s workshop in the 19th century just because many of its resources were aimed at the productive capital. Therefore, we are vainly complaining about the low domestic capital, as long as saving is not encouraged.

Driving on our national roads, you might have noticed the multitude of villas or palaces built by gypsy heads and said to yourself: this is where money goes! But this waste could have its economic grounds.

Classic economists showed that the policy of saving benefited both individuals and the entire nation. They argued that the one who saved rationally, accumulating reserves for the future, did not harm, but helped the entire community.

This virtue of prudence is undermined by the incertitude triggered by institutions charged with market supervision, poor decisions of economic policy (high taxes, inflation targeting, protectionism, etc.) or by the stifling bureaucracy that disregards citizens, turning him into a “little wheel in the state’s mechanism.”

Romanian president Emil Constantinescu once criticised the wealth displayed by those who were thus defying millions of Romanians with extremely low living standards. The underworld is flourishing. Underground economy is based on emerging markets capable to rapidly adjust according to the demand. Huge financial resources are involved in this process. Do they represent a waste for the Romanian society?

An underworld boss can be seen in nightclubs; he is a great tipper; he has a nice villa, people who guard him, a personal driver, de luxe cars, he travels, overwhelms his girlfriend with furs and jewels, gives expensive gifts to his friends, and so on.

This “clan chief” is popular among hotel doorkeepers, cloakroom attendants, waiters, fur merchants, jewelers, etc. They all see him as a benefactor. His expenses generate jobs, because the goods and services he uses are produced in certain fields: gambling, the foodstuff sector, fur industry, and so on.

Unlike this boss, millions of Romanians enjoy very little popularity. Usual people can seldom be seen in nightclubs, first-class restaurants, on Spanish or Greek seacoasts, or in fashion boutiques.

They lead a modest life, trying to save “something” for retirement, for children or in order to fulfill a dream, and when these savings “melt away” following banks’ bankruptcy, financial crashes, black holes of economy or are swallowed by the monster called inflation, they are seized by despair.

Although most Romanians avoid to place their money (lei or dollars) in banks, fearing bankruptcy, none of our macroeconomic managers thought of how “to activate” that money. They do not “work” for the Romanian economy, especially when dollars or Deutsche marks are placed in banks from abroad.

If they trusted the Romanian banking system, they would decide to deposit their money in a bank that grants money as credit for productive capital or buys securities (shares, bonds), therefore in a bank that invests money.

But when money is invested, it is used in order to buy or to build houses or office buildings, refrigerators, furniture, computers or cars.

Any of these projects puts into circulation the same amount of money and generates the same number of jobs as in the case when the person who invested the funds would have used them for self-consumption.

Therefore, when it comes to jobs, the “savings” of millions of Romanians and the expenses made by the underworld leader have the same result and put billions of lei into circulation.

The difference is that the jobs triggered by the “boss” of the local Mafia are obvious, while those generated by savings are “hidden.”

One day, we find out from the media that the boss has been placed under arrest. After more than a year, he has gone bankrupt. He has spent all his money on lawyers in order to come out clean.

Finally he is released, but everybody avoids him, knowing that he has been under investigation. He is no longer seen around shops, in nightclubs or at horse races.

He is criticised even by those with whom he has been generous. On the other hand, those who saved money have created more jobs due to the fact that their income has increased (because they have invested), but also because their investments have generated better-paid and more productive jobs.

Their capital and income have risen. They have increased the productive capacity of the nation. The Mafioso boss has not.

I have said that the bent for saving is undermined also by errors of economic policy. Workers from a series of state-owned enterprises have lately opposed privatisation, anticipating that they will lose their jobs.

The continuous recession of the last years of transition affected the bent for saving. Saving is usually associated with the idea of “accumulating money.” But sometimes it is associated with the idea of investing. Often, people make no difference between the two meanings.

The simple accumulation of money, if it is done irrationally and without any motivation, is harmful in almost every economic situation. We cannot say that this form of saving money, namely of keeping them blocked, is not frequent in Romania. Especially when money is saved in foreign currency.

According to some banking sources, the population currently holds more than one billion dollars. In this case, we cannot say that money is turned to good account. Bankers’ call: “Don’t let money sleep” is ineffective as long as incertitude amplifies and the crisis deepens.

In a period of economic decline, both consumption expenses and investments are going down. Consumers cut their purchases. Their behaviour is explained by the fear that they might lose their jobs and subsequently they wish to keep their reserves. The same idea guides those who are about to retire.

They buy less not because they want to spend less, but because they want to make sure that, in case they lose their jobs or leave the active life, their power of consumption will cover a longer period of time.

Newspapers abound in house sale ads. Letterboxes are full of advertising leaflets sent by real estate agencies that urge people to make deals with them.

Everything depends on the dollar. Bucharest falls in the dollar area. Those who saved a lot in order to buy a house, fearing that the bank holding their savings can go bankrupt at any moment, are waiting for the price of houses to go down.

Any rumour makes them withdraw their dollars from the bank and keep them in their houses, waiting for the most opportune moment to make the deal.

They are postponing this deal, hoping that with the same money they will be able to buy a better house. They maintain their savings in dollars, hoping that their value will rise.

The same reasons prevent Romanians from saving. They have lost their confidence in business profitability or they hope at least to be able to buy shares from Bucharest Stock Exchange or Rasdaq for lower prices if they wait for another few months.

We can deem them either as persons that refuse to hold goods, whose value can drop, or as persons who believe that, by keeping their money, its value will rise.

This behaviour of temporary refusal cannot be seen as “saving.” It is not generated by the same reasons as a normal saving process.

And it is an even bigger error to say that this kind of “saving” triggers economic depression. On the contrary, this behaviour is triggered by depression. It is true that this refusal to buy can intensify and extend a depression period. Which is also happening at this moment.

When the Government gets involved in economy and businessmen do not know which its next move will be, a state of incertitude is created. And profit is not reinvested.