What Is Forced Saving?

Forced saving happens when consumers cannot make purchases and are compelled to retain their capital. This can occur because there is a shortage in supply that makes it impossible to find goods, or as a result of high prices that make goods difficult to afford. It is a phenomenon that can have serious economic impacts, including contributing to the formation of a boom and bust cycle. This differs from voluntary saving, when people decide on their own to set money aside.

Economist Ludwig von Mises discussed forced saving and its implications in the early 20th century. He pointed out that it could have a net effect of increasing inflation over time, which could contribute to the creation of an economic bubble. As the bubble stabilizes, it can pop, creating problems like a sudden radical fall in the value of assets, including cash that may be held in savings. This bust aspect of the economic cycle can be particularly hard on people with limited resources.

Interest rates tend to fall during a period of forced saving. Banks have ample money available for lending, thanks to the funds on deposit, and not enough customers applying for loans. This market can be favorable for people shopping for loans or looking to consolidate because financial institutions cannot afford to be choosy about customers. In addition to low interest, people may qualify for other favorable terms that benefit them, like waived origination fees to cut the price of initiating the loan.

Periods of forced saving should be able to correct themselves over time. Either the price of goods will fall to make them more affordable so companies can sell them, or supply will adjust to demand to make more products available to the public. Consumer spending can be an important component of the economy, and manufacturers have an interest in limiting periods of forced saving because they can result in a fall in profits. Some companies may not be able to weather the period of decreased consumer spending and could fail.

Governments may intervene as well, depending on their economic policies. Interventions may include measures to promote consumer spending and control inflation, like limiting the overall money supply. These activities are not always successful, and are sometimes criticized by free market economists who argue that self-regulation is critical for balance. They believe that problems in the market will correct themselves, given an opportunity to do so, and that government measures to protect the public may do more harm than good in the long term.