On an internet forum there is a discussion about economics. A person there explained that people who save money are bad for the economy, and that if everyone saved, the economy would collapse.
So, I posted the following (the italisized portion):
first of all it is not possible that there could ever be a situation wherein everyone saves. There will always be transactions of some kind, until there is only one person left alive. Second: in the absence of a Central Bank, savings is what sets interest rates. When savings is high, interest rates come down (supply and demand works on everything). When those interest rates come down, businesses realize that now is the time to embark on investments in the factors of production. In other words: they expand. A steel mill, for example, might build a new furnace. This is market regulation, without the government. The low interest rate, caused by saving, tells producers two things: 1) it's time to expand. It's financially feasible. The cost of borrowing money is cheap and 2) When our investments in capital come to fruition, the public will have the money to buy the products we are producing. So, savers, far from being a drag on the economy, are actually the ones who drive the economy. That's in the free market. What we have today is not the free market. Savers are still important to the economy, but they do not drive the economy as they do in the free market.
Two questions: first of all, is what I posted accurate?
Second: in this central bank dominated economy, what is the purpose of savers? I can't possibly believe that savers are deliterious to an economy. That's the obvious corrollary to the dumb Krugmanian idea that consumption drives an economy (sure, I realize it's Keynsian, but Krugman is the diable du jour).
The function of savers in this economy, I think, is to have a moderating effect on the bust phase of the business cycle. If it so happens that the Fed arbitrarily drives down interest rates artificially, at the same time savings are high, then the inevitable bust won't be as bad.
What say you, gentlemen (and ladies)?
Read my Nolan Chart column "Me & My Big Mouth"
If everyone saved, it would simply be a different kind of economy, not no-economy or a collapsing economy. If you wanted people to consume, and against their will, you will have an economy crowded with malinvestment, and things people really don't want. You get bubbles, like housing
Consumption does not drive the economy. I need to pull up the hard statistics. But private investment, and capital is larger, than the amount of dollars consumed. Investment is larger than consumption
Good point on the interest rate
do we get free cheezeburger in socielism?
What you said seems accurate, to me.
Consumption is what sustains a fiat money regime, which is why most people following Keynes view savers as deleterious to the economy as a whole.
In a free market (i.e., absent a central bank/fiat money) production, not consumption, is the catalyst for economic growth and prosperity. And production is financed by savings.
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David Z
"The issue is always the same, the government or the market. There is no third solution."
Has anyone got a link to that integration of Hayekian insights on savings and the Keynesian idea of the "circular flow"?
That seemed like something useful to employ against Keynesians.
The difference between libertarianism and socialism is that libertarians will tolerate the existence of a socialist community, but socialists can't tolerate a libertarian community.
It is savings and production that drive an economy. Not demand, debt and consumption. In starving Africa I'm sure there's plenty of demand and I'm sure if you open up a bank there many will be willing to borrow. But you can't build an economy on it.
When dealing with a topic like this, throw away the medium of exchange which is money. Consider a barter economy. A borrower will borrow the excess that someone else has produced and chosen not to consume. If the producer consumed all he made (had no savings) then there would be nothing for the borrower to consume. Someone has to save (forego the consumption of their surplus production) in order for someone else to borrow that surplus. Savers forgo their certificate (money) that entitles them to consume and lends that certificate to the borrower for them to consume that which the saver didn't consume.
Saving money in your bank account is not the same as sticking it in your mattress. The bank turns around and lends it out to businesses. The more savings in the bank the lower the interest will be on the loans to businesses. Businesses borrow this savings (the same as borrowing the steel or cotton the saver choose not to consume) and use it to increase the productivity of their business, to create jobs and even more abundance of goods & services at lower prices. Prices fall and there will be no price inflation because the Federal Reserve doesn't create money out of thin air for people to borrow. You actually end up with more goods being chased by less money - causing prices to fall, businesses expenses to fall and real wage rates to rise.
Consumption will not end. People still need to live. People still eat, need energy, need cars to get to work, need clothes, need entertainment, etc.. but the reduction in consumption enables future produce to be cheaper and more abundant, and the savers with their appreciated money wealth (with interest) will be able to afford more of the produce. Things will settle at an equilibrium point where people will only save a certain amount and consume a certain amount.
david_z: Consumption is what sustains a fiat money regime, which is why most people following Keynes view savers as deleterious to the economy as a whole.
They also believe that if someone is saving money it is a "surplus" because it isn't being used. Therefore it is not only justified but also necessary for the state to "borrow" that surplus and put it to productive use.
This is logically false but has a great appeal to the uneducated...
You mentioned a steel mill. Isn't that representative of savings? Without savings, how could there exist a steel mill? Savings being consumed, wouldn't that mean that the steel mill melts its own machinery instead of iron or?
It's not fascism when the government does it.
“We must spend now as an investment for the future.” - President Obama
I think the best recent debunking of the "savers cause recessions" is Robert Murphy's piece Consumers don't cause recessions