If someone accumulates cash by underconsuming, and then lends that cash to a borrower, then the borrower immediately receives an increase of purchasing power, which they can then use to invest in higher-order capital goods. The economy's structure of production has lengthened.
Now what if the underconsumer instead had decided to keep the extra cash and not lend it? The resulting price-deflation will transfer the purchasing power to everyone else in the economy, but will this be instantaneous? Perhaps not - the first sectors to see the effects of the deflation will be the ones closest to the underconsumer, and it will take time to propagate through the rest of the economy.
So, is it possible for an economy-wide increase in demand for cash to result in underconsumption that is not accompanied by any increased investment until later, when the deflation has propagated?
Zavoi: So, is it possible for an economy-wide increase in demand for cash to result in underconsumption that is not accompanied by any increased investment until later, when the deflation has propagated?
Yes. If everyone decided to take that money out of their mattress and invest it in capital goods, it would create an inflationary effect in the capital markets, but it would still be consistent with the actual intent of f the individuals as far as consumption vs. savings.
Really, what is happening here is that savers are simply changing their investment preferences: From investing in money to investing in Capital goods. Resources will shift to higher order production, but it will be reflective of the real consumer time preference. No artificial boom should arise.
A delay of consumption, IE a temporary increase in the standard of living of others due to an increase in the real purchasing power of money.
Decreased supply = higher marginal value for existing units.
"The first Accounts we have of Mankind are but so many Accounts of their Butcheries.All Empires have been cemented in Blood..."
- Edmund Burke, A Vindication of Natural Society
Probably, if a large number of individuals, 10% of the population, suddenly decided to hoard cash then you might produce the effect you anticipate. The issue is getting large numbers of individuals who are in varying levels of debt and cash holdings to do this. Some number of these people will realize that their cash is increasing in value. Once beyond their preferences to hold cash these folks will invest it in other ways or simply consume it for goods they want.
This is the reason we have futures and derivative markets to even things like this out. Speculators who see the small increases in the value of a dollar will modify their dollar holdings and/or enter into contracts to secure their holdings depending on what they expect the value of cash to do.
DD5:Yes. If everyone decided to take that money out of their mattress and invest it in capital goods, it would create an inflationary effect in the capital markets, but it would still be consistent with the actual intent of f the individuals as far as consumption vs. savings.
Does this mean that there can still be a bust (widespread underutilization of resources) even without a preceding boom?
Bogart:Probably, if a large number of individuals, 10% of the population, suddenly decided to hoard cash then you might produce the effect you anticipate. The issue is getting large numbers of individuals who are in varying levels of debt and cash holdings to do this. Some number of these people will realize that their cash is increasing in value. Once beyond their preferences to hold cash these folks will invest it in other ways or simply consume it for goods they want.
It seems conceivable that an increase in the value of cash could have the opposite effect, causing more and more people to convert their savings to cash in anticipation of future price-deflation. Do futures and derivatives prevent this kind of self-perpetuating cycle from occurring?
There are two separate cases to consider, hoarding fiat money and hoarding gold.
If you hoard fiat money, you accomplish nothing. Your savings will still be stolen via inflation. It makes no difference if you store Federal Reserve Notes under your mattress or in a checking account. They are stolen by inflation either way.
Consider a free market with a gold standard.
If you decide to hoard gold, then prices will fall as there is less money in circulation. If you decide to hoard gold, interest rates will rise as an incentive for other people to not hoard gold.
If someone starts monopolizing gold, then the price of gold will skyrocket and they will have a hard time buying more and more gold. People would stop using gold as money and start using silver or other goods. The gold hoarder accomplishes nothing.
In 1932-1933, people starting hoarding gold as a defense when they realized the government was going to default on the gold-redeemability of the US dollar. These plans were frustrated when Roosevelt declared gold ownership illegal and confiscated the gold.
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