2.2 Smaller Pensions
With pension funds, the process of saving and withdrawing is a continuous one. Some of the out-flowing money comes from contributions by younger subscribers, but much of the funding is taken from the dividends on prior investments made at the stock-exchange. After these have slumped there is less money available for paying regular pensions, even though some of the losses are spread by insurance. The managers of the funds want to avoid disproportionately high withdrawals and the result is that smaller sums are paid out. Consequently the pensioners have less income to meet their needs and they buy smaller quantities of consumer goods and services.
2.3 Bank Insolvency
The multiple-credit structure of the finance-system is now under heavy stress. With slump conditions prevailing, some of the investors and speculators are defaulting in the return of their credit, due to their inability to sell the land and buildings even for the sums at which they were purchased many years before. In parallel with this, due to the reduced level of production and wages, savings are being withdrawn at greater rates, because the reduced average rate of consumption is still more than the reduced average rate of earnings. These effects add to the credit squeeze.
The use of fixed-term savings accounts, where the money is placed in fractional-reserve bank-deposits, provides the banks with credit and it usually circulates at a good rate. Only a small proportion of the savings, from which the banks previously borrowed, are stored in their vaults. The rest is credited to the newer investors (at greater rates of interest than the savers can obtain, which normally enables the banks to become rich). But now the banks have difficulty in calling in sufficient credit for its return to the savers, some of whom have panicked and are pulling out their loans in the form of cash or placing it in current accounts having greater liquidity. These banks are forced to sell their long-term holdings at reduced prices, in order to balance their income with the greater outflow, since they have no-one else from whom to borrow. Money demand can no longer be easily met by its supply and the short-term rate of interest on credit rises. The money starvation at the banks causes some of them to declare insolvency and to become bankrupt, which results in the return of the credit being deferred, if in the closing-down process these savings have not been lost.
The irony is that later when the slump begins to ease, much of the money that is now in the hands of the nervous savers will again need to find investment opportunities and it will be returned to the banks deposit accounts. So the bank crisis is temporary and is partly due to the psychological state of these savers.
2.4 Reduced National Income
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