SSIAs

Jayeire

Hi,

Just wondering if any1 is aware of the original intentions of the SSIA, obviously it was to curb inflation, and perhaps a political incentive so the public would look favourably on those implementing it. Anybody-else got any further ideas??

kaizersoze123

To encourage people to start saving, even after the SSIA matures.

Time Magazine

I'm cynical, but I think the main factor was the windfall effect on the voting public six months before an election.

Exactly how taking money out of the economy and multiplying it by 1.25 is anti-inflationary I'm not quite sure.

markk06

Yes, but prior to the SSIA marginal propensity to consume in Ireland was extremely high. By implementing a scheme which created an incentive to save you were killing two birds with one stone. On one hand it was counter inflationary in the short term, and on the other it created a culture of saving in this country. All you have to do is look around and see all the saving schemes being offered by financial institutions now on the back of the scheme.

Also on time value of money the actual difference would not be equivalent to 1.25
I may be wrong and may be smited by economists for this but could this be seen as counter cyclical intervention?? saving in a boom and investing heavily during a bust?? (i might have that completely wrong)

Time Magazine

markk06 wrote:

Yes, but prior to the SSIA marginal propensity to consume in Ireland was extremely high.

And it still is! MPC is incredibly hard to measure but I imagine with that "windfall" effect the MPC would be actually higher than in c. 2002.

By implementing a scheme which created an incentive to save you were killing two birds with one stone. On one hand it was counter inflationary in the short term, and on the other it created a culture of saving in this country.

But it wasn't really a saving (i.e. deflationary) scheme, it was clearly inflationary. The culture of saving is non-existant in Ireland. We have the highest levels of personal debt in the Western World ever.

All you have to do is look around and see all the saving schemes being offered by financial institutions now on the back of the scheme.

That's an interesting point. Perhaps more to do with a function on income rather than MPS though?

Also on time value of money the actual difference would not be equivalent to 1.25

You're right, it would be slightly higher. The 1.25 rate was the government-guaranteed scheme. It was primarily run by private banks through savings accounts. These offer further interest returns to subdue/match/exceed inflation.

I may be wrong and may be smited by economists for this but could this be seen as counter cyclical intervention?? saving in a boom and investing heavily during a bust?? (i might have that completely wrong)

I smite ye! It can certainly be seen as that, yes. And if that was the aim it might do that. But, it was a very bad method of counter-cyclical planning. There was simply no way anyone could have predicted the 2007/2008 European economic climate back in 2002. The effects of September 11th were not fully understood; there were elections due in France and Germany; interest rates were potentially volatile; the magnitude of China's growth rate and demand for steel was uncertain.... there was simply no way of knowing which quarter (and economists plan these things that precisely) should the boom have kicked in. That's why I reached the conclusion the date of about six months before a General Election was chosen politically.

Now if Charlie wanted to engineer a counter-cyclical method, it was very easy. He didn't have to increase public spending by 20% the year before the 2002 General Election. He could have increased tax rates by a couple of percent to reap huge benefits (by God the economy could have sustained it). He could have saved these taxes, bet them on Istabraq if he wanted, and waited until we could actually decide which quarter needed a fiscal expansion.

So in sum the SSIA were overall quite inflationary. They were timed terribly. They catered only those who could save and were thus inequitable. They were planned by a politician to start reaping benefits in the run-up to an election.

They were, in effect, the most complicated election ploy Ireland has ever seen.

markk06

I would love to get in to an economic arguement with you Ibid but im afraid i cant since i agree with all your points... Bar the one about it not being a savings scheme, but how and ever.

I also think if the government had wanted it to be a proper saving scheme they would have opened it up to people under 18, maybe 16 and upward. The result of this would have been a lot of 21 and 22 year olds coming out of college now with a nice lump sum. Of course this brings about the problem of these young people not keeping up their repayments on it. I for one know I would have easily been able to afford to save it, most may not, but in that case they don't reap the interest. Of course the fact that young people don't vote may have twisted charlies arm.... or that may be me just being a cynic...

nesf

Ibid wrote:

I'm cynical, but I think the main factor was the windfall effect on the voting public six months before an election.

Exactly how taking money out of the economy and multiplying it by 1.25 is anti-inflationary I'm not quite sure.

Perhaps, but tbh there are benefits to the scheme that make it worthwhile (encouraging saving in a population in love with credit is no bad thing). Plus, no party would time it in any way differently if they were doing it so it's timing is a non-issue in my mind (though this is probably best left to politics and not here).

D'Peoples Voice

Jayeire wrote:

Hi,

Just wondering if any1 is aware of the original intentions of the SSIA, obviously it was to curb inflation, and perhaps a political incentive so the public would look favourably on those implementing it. Anybody-else got any further ideas??

Actually it was a way of the Government getting themselves out of a fix. People should be so lucky as to think the governemnt were visionairies and were thinking of the effect 5 years down the line!
2000/2001, the Irish Government were running a budget deficit at a time monetary policy was expansionary, and inflation was already one of the highest in the euro area.
Charlie McGreevy was called over to Europe to explain just what the hell we were doing. So he said he was going to suck money out of the economy!

Given that the government facing an election in 2002, the government weren't going to cut back on their budget deficit. Remember this was around the period Government spending was running in the high teens. Hence in the budget of late 2000, the SSIA was born, except it wouldn't be avail til May 2001.
So in short, Government puts money, SSIAs take money out.
As for when they mature,
too short - and country will not be in a position to absorb the influx of money
too long- people will not be interested
So they went for a term that was comaprable with many of the tracker bonds available at the time - 5 years.