Monday, 19 August 2013

PPI compensation fuels economy

Over the last year or so the banks have been compensating people for mis-selling payment protection insurance (PPI) on loans that they had taken out. About £10bn has been handled out and the ONS has worked out that this is actually fueling economic growth.

Effectively banks are now taking money from savers, by reducing the savings rate, and giving it to people who had loans, who are spending it.

The interesting thing about this money flow is that the "free" money is being targeted at people who will be inclined to spend it - people who have a history of borrowing to spend rather than people who save and then spend, or just save.

Keynesian economics dictates that when the economy is in recession the government should inject cash to get the wheels turning. Usually the problem with this cash injection is that in a recession many people will feel more motivated to save than spend and cash just piles up under mattresses (metaphorically speaking). This is the classic Japanese problem: the more money you give the people the more they save and the less economic activity actually happens.

But now we have the cash aimed straight at the section of society likely to spend it. Nice!

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