Economics Questions

Re: Can a decrease in savings cause recessions?

bearing01 — Sat, 05 Dec 2009 18:20:05 GMT

Tobbog:

What is the exact difference between a recession and a business cycle?

bearing01:

The Austrian business cycle is created by the economy becoming depleted of real wealth due to a central bank's inflationary money creation policy. Real wealth is depleted because consumers spending counterfeit money (creating loans out of thin air) are securing goods / wealth simultaneously as producers - who earn money by producing goods - try to consume. If producers saved their money and did not spend it, that money would be lent to the debtors instead of a printing press having to create it. Debtors would then consume the goods that the producing savers are deciding to consume in the future (when they are re-created by the debtors).

as per:Economic Recovery Requires Capital Accumulation, Not Government "Stimulus Packages", by George Reisman

In a nut shell: Low interest rates due to central bank monetary expansion will misallocate capital in the structure of production - misleading producers to get them to invest in more advanced and higher divisions of production, over a longer period of time. The demand for low order (final product) consumer goods remains higher than it should be as per the interest rate signal to producers. Producers therefore misallocate capital in processes to turn out those goods that are in immediate high demand, mistakenly producing them later rather than sooner. The Business Cycle acts to reallocate the structure of production to shorten the production time. Employees hired for high orders of production get laid off and rehired to work in areas of low order production.

A "recession" is a new label politicians use for depression. Only thing is that the term "depression" became a terrible frightening word after FDRoosevelt turned what could have been a normal "depression" (over in a year) into a lost decade due to his socialistic and fascist policies.

But an economy that uses 100% reserve banking or uses commodity money will not suffer the massive misallocation of capital and "recessions" as we have seen since the invention of the Federal Reserve or other central banks. Yes, the free market can have a misallocation, but it's not severe like that caused by central economic planning of banking cartels using fiat money - as does the Federal Reserve.

On the gold standard there were minor economic adjustments along the way. Entrepreneurs are human and are not perfect forecasters. But usually, in history, when recessions/depressions were severe enough to write about in the history books, they were a result of the bankers inflating the money supply (counterfeiting certificates / claims on stored gold) and this created economic distortion. That or kings would clip or debase the gold coins and the theft to make more coins. Then a deflationary depression was created by a contraction of the money supply - in returning back to the gold standard - while reallocating the economy.

Re: Can a decrease in savings cause recessions?

Tobbog — Sat, 05 Dec 2009 16:09:41 GMT

Esuric:
If the ratio of consumption to savings increases too much in favor of the former, then you will have a recession (Hayek and Austrians are over-consumptionist's, as opposed to Keynesians and Marxists who are underconsumptionist's).

So you would consent to the statement that recessions are possible without government intervention?

Esuric:
Thus, the cause of the recession and the business cycle are not the same. You can never get rid of recessions, but you can, at least theoretically, eliminate the business cycle.

What is the exact difference between a recession and a business cycle?

Re: Can a decrease in savings cause recessions?

Marko — Sat, 05 Dec 2009 15:33:53 GMT

When long term projects realise they are in trouble.

Re: Can a decrease in savings cause recessions?

nirgrahamUK — Sat, 05 Dec 2009 00:16:59 GMT

just curious, within the context of this thread, are we using the state economists definition of recession (which appeals to GDP figures)?, or are we taking a man on the street view?, or is there a distinctly Austrian conception that is the focus?

Re: Can a decrease in savings cause recessions?

Esuric — Sat, 05 Dec 2009 00:13:05 GMT

Tobbog:

Suppose we had the gold standard and every major bank held 100% of deposits in reserve.

Now, the only determinant of an economy's production structure would be real savings. What would happen then, if a majority of savers decided, for whatever reason, to decrease savings by a large portion. Wouldn't that drive up real interest rates and thereby eliminate many business projects, cause major short-term unemployment, secondary deflation and so on, in short, wouldn't that cause a typical Austrian Business Cycle?

If the ratio of consumption to savings increases too much in favor of the former, then you will have a recession (Hayek and Austrians are over-consumptionist's, as opposed to Keynesians and Marxists who are underconsumptionist's). Business cycles, on the other hand, are caused by a divergence in the market rate of interest relative to the natural rate. Thus, the cause of the recession and the business cycle are not the same. You can never get rid of recessions, but you can, at least theoretically, eliminate the business cycle.

Re: Can a decrease in savings cause recessions?

DD5 — Sat, 05 Dec 2009 00:06:56 GMT

Student:
"Interest" is defined EXPLICITLY as a fee paid for borrowed assets.

If by "borrow" you mean the loans market, i.e., banks, then this is not true according to Austrian economics. The loan market is a relatively small part of the entire time market where the rate of return in the ERE is the interest rate.

Re: Can a decrease in savings cause recessions?

Marko — Fri, 04 Dec 2009 23:01:53 GMT

No problem. I`m finding your politeness quite disarming.

Re: Can a decrease in savings cause recessions?

Student — Fri, 04 Dec 2009 22:57:35 GMT

Sorry, I misremembered your comment. I should have clicked back to the first page to double check.

Re: Can a decrease in savings cause recessions?

Marko — Fri, 04 Dec 2009 22:53:26 GMT

Student:

Actually, purchasing gold would no more reduce the money supply in circulation than if you bought a pie. You have given someone else your currency for their gold. They can then go out and spend that currency on something they want.

Since the topic is about savings rates I pressume the money that I spend on gold comes from a savings account. Once it is in gold it can not be lent out, thus the interest rate rises. Whoever got my money may put it in a savings account, but he may also not do so. So on balance you have a lower savings rate.

That was the theme of the discussion to my understanding, not the quantity of money. Quantity of money is only important as what causes the people to flee into gold in the first place.

Re: Can a decrease in savings cause recessions?

Student — Fri, 04 Dec 2009 22:38:00 GMT

Marko,

Actually, purchasing gold would no more reduce the money supply in circulation than if you bought a pie. You have given someone else your currency for their gold. They can then go out and spend that currency on something they want.

Really, the only thing that distinguishes gold from pie is that gold has a better rate of return. :-P

PS* Gold does not earn "interest", it earns a rate of return which can be compared to the rate of return of other investments. These are not the same terms and they have different implications. "Interest" is defined EXPLICITLY as a fee paid for borrowed assets.

http://en.wikipedia.org/wiki/Interest

Re: Can a decrease in savings cause recessions?

Marko — Fri, 04 Dec 2009 22:33:39 GMT

Ok, I stand corrected.

Re: Can a decrease in savings cause recessions?

DD5 — Fri, 04 Dec 2009 22:29:14 GMT

Marko:
The same happens now. But people instead of running into currency run away into gold. (At least the smart ones do.) Gold can not be lent out and earns no interest either.

Gold earns interest like every other investment. If it didn't, then people would move their savings from Gold and seek other investments that did. The rate of interest is the ongoing discount rate on future goods relative to present goods. It is a product of the time market which comprises ALL savings in the economy. Interest is not just the rate of bank loans.

When investing in GOLD, you are still saving. You are still forgoing present goods for the benefit of future goods, therefore Gold and all other investments will have a rate of interest.

Re: Can a decrease in savings cause recessions?

Marko — Fri, 04 Dec 2009 22:28:30 GMT

Tobbog:

Can a decrease in savings cause recessions?

But what would cause the decrease in savings? Lets say if the news said a giant meteor is going to crash into Earth and that would be the cause. Then you can not possibly say that this decrease is a bad thing. It is a good thing that people should decide to spend some of their savings to A.) have some fun while they stil can B.) scramble to construct shelters and storages.

It would not really be a "recession" as we know it. Technically yes, but it would actually be a welcome thing. You do not want people taking out loans to build another Disney World while a giant meteor is on the way.

Re: Can a decrease in savings cause recessions?

Student — Fri, 04 Dec 2009 22:25:41 GMT

I was not referring to the question at hand, I was describing what a "secondary deflation" is, which at least one person asked.

Can a secondary deflation happen if people have a shift in time preference? I think so. They may be saving less money over all, but as a result of fears of coming recession, they may shift the balance of their portfolio toward cash.

"secondary deflation" is more about portfolio composition (what assets are you holding your savings in, i.e. cash/bonds/metals/stocks) than it is about time preference (the total amount you are saving).

Re: Can a decrease in savings cause recessions?

DD5 — Fri, 04 Dec 2009 22:20:30 GMT

bearing01:

Marko:

Silly. They will not hoard cash. They will put it in banks, from where it will be lent out.

Yes.

Taking money out of a bank and putting it in a mattress (taking it out of circulation) is deflationary. Mattress money that never gets spent is dead money. Money horded in bank accounts never stays put. It gets lent out and someone else spends it.

You are completely misunderstanding the question at hand.

The questions was not about moving from one type of savings to another type of saving. It was about a decrease in savings, which is by definition, means a rise in time preference. This means a rise in consumption. If people are putting their money under the mattress, then their time preference has not risen at all, just their preference for one type of saving over another.