Topic: Economics
Blaming Savers for the Bust! I recently had a discussion with someone about the economy. The person explained to me that people who save money are bad for the economy, and that if everyone saved, the economy would collapse. In this article, I discuss my rebuttal to this person, in much greater detail than I did during the discussion.by Steven McDuffie
(libertarian)
Sunday, May 3, 2009
It seems to be fairly commonly believed that saving money has a deleterious effect on the economy. I was recently told that if everyone in the US saved, the entire economy would come to a complete halt. This is the obvious corrollary to the dumb Krugmanian idea that consumption drives an economy (sure, I realize it's Keynesian, but Krugman is the diable du jour).I responded thus:
First of all it is not possible that there could ever be a situation wherein everyone in an economy saves. There will always be transactions of some kind, until there is only one person left alive.
Secondly, 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:
It's time to expand. It's financially feasible. The cost of borrowing money is cheap and
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.
What I described above, of course, is a laissez-faire economy. 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.
In this central bank dominated economy, what is the purpose of savers? The function of savers in this economy 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. There won't be as much malinvestment in the economy to be cleared out, because the consumers will have the money to procure the products that the producers manufactured.
Incidentally, something like the real estate bubble could never happen in a laissez-faire economy, because if the public suddenly started investing absurd amounts of money in a particular commodity, soon enough the savings would start to become depleted. As that happened, the interest rates would climb, and the bubble would be deflated even before it really got going.
But when you have a central bank that can artificially push down the interest rates, that free market check on outrageous, irrational investing is gone.
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Posted By: Walt Thiessen
Date: 2009-05-03 04:08:41
Actually, you and your friend are both right. Our current fiat money system is debt-based. This means that every dollar ever created entered the economy via an issued debt. Most commonly, such debt originates with the U.S. Treasury, and the Federal Reserve buys the debt (a bond, note, or bill) and "monetizes" it, turning it into fiat money. This money ends up in the banking system. Through the "magic" of fractional reserve banking, it multiplies by roughly ten-fold, resulting in monetary inflation which eventually leads to price inflation. Pay off all dollar-based debt on the same day from everywhere around the world, and all U.S. dollars would disappear! I know it won't happen, but the mental exercise is highly instructive, because it drives home the fact that all fiat money truly is debt-based.
This has some critical implications. Since any increase in the fiat money supply results in greater overall debt, it means that greater overall debt is necessarily inflationary, while less overall debt is necessarily deflationary.
The reason saving money in a fiat economy tends slightly to be deleterious is that it discourages more borrowing. An economy dependent upon borrowing will tend to inflate, creating the illusion of prosperity. When people save and pay off debt instead, they produce the opposite effect, which drags the economy down.
On the other hand, in a 100% free market economy, debt-based fiat money cannot exist (because fiat money is not a creature of a free market...its dependence upon a government decree for its existence and its status as "legal tender" is the only thing that makes it survive in an economy). Without the fiat money to drag the economy down, your friend's claim would fall apart, but so long as we continue to suffer under fiat money, his claim has some validity.
It has to be remembered "who" is saving. Money deposited in banks has little to do with saving. Bankers make the decision as to where the depositor's money goes, so only the "reserve" amount is actually really saved. If the banker decides to put the depositor's money in a place considered saving, then I suppose it is saved.
As Walt described above, much of what is considered "saving" now is government debt servicing. The less confident investors and bankers feel, the more they debt service the government, forcing interest even further down, encouraging more gov. debt and siphoning money from true saving or storage or capital projects.
True free market saving[storage] would cause higher interest rates, which would lure capital to capital projects instead of saving. In the controlled economy we have, the financial sector [including the Fed] makes all the decisions for the rest of the economy, so whether money is 'saved' or not, and whether interest goes up or down depends on what they decide to do. When someone like Krugman puts that message out, they are simply trying to gain control of the last few dollars in our wallets, they are aware that we have lost the real option to truly save or store.
Posted By: Jake, the Champion of the Constitution
Date: 2009-05-04 11:42:09
Dear Stephen -
good article and kudos to the replies from both Gene and Walt (or so I think anyways, not sure if you agree :)
Your friend and you might also discuss what happens when the interest rate approaches zero and is held there as the FED is intent upon doing. Not sure if you read Antal Fekete, but he has an interesting theory here that I am still musing over. Your article reminded me of this excerpt:
"The present contraction of the world economy is not due to a glut in global savings for which businessmen can find no good use, and which consequently has to be mopped up through expanding the balance sheet of the central banks all over the world, as “explained” by Paul Krugman and his friend, mentor, and former boss Ben Bernanke.The contraction is due to the lethargy of businessmen who see their past investments turn sour one after another at each interest-rate cut. Businessmen will not make new investments, no matter how badly central bankers want to force-feed them at the trough of newly created money, as long as the mad driving-down of interest rates continues.
Would you buy a car today if you were told that its price will be cut tomorrow? Of course you wouldn’t. Well, it is the same with businessmen. They would not make an investment today if they were told that tomorrow they could finance it at a cheaper rate and, the day after tomorrow at a rate cheaper still. "
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