Monday, November 23, 2009

Investment Makes Saving Possible

Over any period of time, in any nation, the total quantity of investment that takes place must equal the total quantity of savings that are generated.

In the simplest case, where there are no inventories, depreciation, government, or foreign trade, it is trivial to prove that “savings equal investment.” It starts from the premise that all income is earned by producing something, so that the total of everyone’s income equals the total value of everything that gets produced. That “income equals output” (at the national level, though technically only when net foreign income is zero) is a very basic truism in macroeconomics. (As I recall, by the time I had attended my third class in the subject, I had already forgotten that there was a conceptual difference between output and income, and even today, outside occasional spells of lucidity, I labor under the delusion that the two terms are synonyms.) Everything produced is valued either for benefits it has in the present (“consumption”) or for benefits it will have in the future (“investment”). Thus “output equals consumption plus investment.” Savings are defined as unconsumed income. Thus “savings equal income minus consumption.” You do the algebra.

It’s pretty straightforward to add inventories, depreciation, government, and foreign trade and show that the algebra still works. But I don’t find the algebra very enlightening. The algebra shows what must be the case, but it doesn’t explain how it gets to be the case. I mean, people make decisions about how much to save, and other people (businesses, mostly) make decisions about how much to invest. Does the Good Fairy come along with a magic wand and make sure that one side is deciding the same number as the other side?

I’m going to try to avoid exceeding my snark limit here, but the conventional explanation does seem to me, at least under today’s circumstances, to be more a fairy tale than an enlightening description of reality. The Good Fairy in this story is called the Loanable Funds Market, and her magic wand is called Market Clearing. Savers (households with income to save) bring their funds to market, and investors (firms with potential capital spending projects) bid on those funds until they are used up. If the firms are really determined to invest, maybe they can offer an interest rate so high that it will induce households to save more. If households are really determined to save, and firms aren’t very interested in investing, then the households can offer to lend at lower and lower interest rates, until they find one that clears the market.

Many economists enjoy telling their students this fairy tale. I gather that some economists even believe it almost as if it were literally true. But as a description of how savings actually do come to equal investment, it has some problems. First, as a theoretical point, what happens when households are willing to accept a zero interest rate and still can’t unload their savings? In a normal market, when it cannot clear and there is excess supply, the suppliers are out of luck. (The classic example is a worker who is willing to work for less than minimum wage but can’t get a job.) Is that how the loanable funds market works? Do households have to take those extra potential savings and go home and consume them instead, whether they like it or not? Does the Good Fairy force them to consume?

And more generally, empirically, do the institutions of the real world of saving and investing bear any resemblance to the abstract loanable funds market? In real life, funds can be saved but not lent (as when banks decide to use new deposits to increase their excess reserves). In the real world, funds can be lent without ever having been saved (as when the Fed makes loans with newly created money). What does the Good Fairy do to make sure that these discrepancies offset each other?

Even when the funds lent are exactly the same ones that were saved, there can be a substantial time lag between the saving and the lending, and an even longer lag until the actual investment of the borrowed funds. Nor are these just banking issues. When a company issues stock, it is also acquiring “loanable funds” (in the relevant sense), though not in the form of a loan. And just like banks, nonfinancial companies can sit on the cash rather than making immediate use of it. The Good Fairy may be busy forcing reluctant households to consume, but as the end of the quarter approaches, she will have to excuse herself and grab her cattle prod, so she can force businesses to invest quickly. Otherwise the investment may not take place until next quarter, and savings will not equal investment for the current quarter.

If I were the Loanable Funds Market, I would hand in my resignation as Good Fairy. It’s obviously quite an impossible job. (OK, I give up on the snark limit.) And yet, as a matter of algebraic certainty, over any time period, investment must equal savings. If this good fairy quits, we’ll have to hire a new one.

And so we will. Her name is the Definition of Saving, and she’s both more powerful and more subtle than I made her out to be in the second paragraph.

What does it mean to save? It could mean “to set aside part of one’s income for the future.” Only, that definition is deceptive, because it implies a positive act of “setting aside.” There can be positive acts – purchasing a certificate of deposit, for example – that represent the commitment to save, but the act of saving is itself entirely passive. If you get paid in cash and put all the cash in a box without spending it, your are saving. It is no different if you get paid in cash and put all the cash in your wallet without spending it. Like “to rest” or “to fast,” the verb “to save” is defined not by what you do but by what you don’t do. “To save” means “to receive income and not to spend it.”

Bearing in mind the passive nature of saving, think about the old joke where the tourist asks, “Lived here all your life?” and the crusty local replies, “Not yet.” By definition, you have saved if you have received income and have not spent it. Suppose that, a few seconds ago, you received your pay in cash and put it in your wallet. Have your received it? Yes. Have you spent it? Not yet. Like the crusty local, economics is precise. You may intend to spend every single dollar of your pay, but for now the answer to the question, “Have you spent it?” is “No.” Therefore, as soon as you receive your pay, you have already saved it. It has become part of your savings. When you do spend it, you will be dis-saving, taking money out of savings.

The New Good Fairy thus presents us with a bizarre but indisputable fact: all income is saved. If you make the time period short enough, the savings rate (out of newly earned income) is always 100%.

And that’s half the reason that savings always equal investment. The other half has to do with the source of the income. Whoever pays the income must be either making an investment (in which case the amount of that investment exactly matches the amount of the receiver’s new savings) or taking money out of their own savings (in which case that dis-saving offsets the receiver’s new savings, and there is no net change in either savings or investment).

How do we know that the payer must be either dis-saving or investing? The payer is purchasing something, and it must be either for consumption or for investment. If it is for consumption, then the payer is taking money out of savings to pay for it. If it is for investment, then the payer is investing.

To take a simple example, suppose you’re a freelance software developer, and a company pays you to develop some custom software for long-term use. From the company’s point of view, that’s investment. As soon as they pay you, they’ve made an investment, and you have saved the exact amount of the investment they just made. Savings equal investment.

And what happens when you spend the money? To take another simple example, let’s say you spend some of it on a haircut. You are taking money out of savings, so your savings are reduced by the cost of the haircut. But the payment is income for the barber, and all income is initially saved, so the barber is putting into savings the same amount that you are taking out. Total net savings are unchanged, and since there was no investment involved, net investment is unchanged.

The Loanable Funds story tends to give the impression that saving determines the amount of investment. (It’s not the only possible interpretation, but when I hear the story, I tend to think, “Savers decide how much to save, and that is the amount that can be invested.”) In the immediate time frame, however, it is the other way around: investment determines the amount of savings. In general, saving occurs whenever someone receives income. Net saving occurs whenever someone receives income that is not offset by the payer’s dis-saving. That can (and will) happen only when the payer is investing.

In the slightly-longer-than-immediate time frame, people make decisions about how much to save, but it is still investment that makes that saving possible. Suppose, for example, that all investment were to stop for an entire year. Suppose everyone completes or cancels any investment plans by the end of 2009 and nobody makes any new investments in 2010 – no new houses or factories built, no new equipment or software created, no net purchases of foreign securities, and so on. (Because inventories are a form of investment, you also have to imagine – and I’m being a bit tricky here – that manufacturers start 2010 with inventories at some kind of maximum and refuse to produce anything new except to replenish those inventories.) In that case, there can be no net saving in 2010. People will receive income, presumably, but only as the result of dis-saving by others, so the most net saving that can happen is zero.

And just as the decision not to invest can prevent net saving from taking place, so the decision to invest can force people, collectively, to save. Consider the converse thought experiment, where everyone resolves not to save in 2010. "Any income I get in 2010,” everyone says, “I'm going to spend before the end of the year." Then someone comes along and decides to build a factory (financed, let's say, with money that the builder was holding in a safe at the beginning of the year). So the builder hires construction workers to build the factory, and the workers now have income, which they have resolved to spend before the end of the year. So they spend it. Now someone else has income, which they have resolved to spend. When they spend it, yet someone else has income, which they have resolved to spend. And so on. The money keeps getting passed around like a hot potato. Or like a game of musical chairs. At the end of the year, someone will have the money and will not yet have spent it. Someone will have unspent income. Someone will have saved.

I grant you, I've left out a lot of details that could become important. In particular, I've ignored inventories, and I’ve ignored imports, and there are some possible loopholes there that might allow people to avoid saving the invested money in the last paragraph. But I think I’ve made a pretty good prima facie case that the causation normally runs from investment to savings.

You may object, however, that my assertion doesn’t make sense. There must be causation running from savings to investment, because an economy has limited real resources. If people choose to save less, more of those resources will have to be used for consumption, and fewer will be available for investment.

That’s a valid point, as far as it goes, but now you’re not talking about saving income; you’re talking about saving resources. Resources have to be “saved,” in the sense of “not used up by consumption,” in order for investment to take place. You could say, perhaps, that a certain part of our potential real income – the income we would have if we made use of our resources to the greatest sustainable extent – has to be “saved,” in that sense, to make possible a given amount of investment.

But it has become painfully clear that actual income can fall far short of potential. As of today, according to typical estimates such as that of the Congressional Budget Office, the US is (in the relevant sense, though not in the terminology the CBO uses) “saving” about a trillion dollars extra of its annual potential income, over and above any actual income it saves. The US is “saving” that potential income in the sense that, if there were another trillion dollars worth of investment to be done, the resources to do that investment would be available. Those “savings” aren’t being used for investment; they’re being more or less thrown away – held in reserve, if one may speak euphemistically. The unemployed, the idly-self employed, the discouraged workers, the involuntary part-timers, and everyone else who would be doing something more productive in a better-functioning economy – they are the human counterpart of banks’ excess reserves. In real terms, they represent the idle portion of our national savings.

That’s certainly a coherent way of thinking about savings, and it is one in which savings put a constraint on investment. But it doesn’t conform to standard semantics. In practice, nobody counts those extra “savings” as savings. If you want to increase the savings that count, you have to find a way to increase investment.



DISCLOSURE: Through my investment and management role in a Treasury directional pooled investment vehicle and through my role as Chief Economist at Atlantic Asset Management, which generally manages fixed income portfolios for its clients, I have direct or indirect interests in various fixed income instruments, which may be impacted by the issues discussed herein. The views expressed herein are entirely my own opinions and may not represent the views of Atlantic Asset Management.

268 comments:

«Oldest   ‹Older   201 – 268 of 268
Muarabet said...

Judi Bola Online Terpercaya
SBOBet
Bandar Bola
Situs Bola
Poker
Online Casino

It's Really a Nice and useful. Thank You For Sharing With Us

CarterRuiz said...

I am often to blogging and i really appreciate your content. The article has really peaks my interest. I am going to bookmark your site and keep checking for new information.

BET Fact
Dream BET

Sproter Crati said...

Have you ever thought about including a little bit more than just your articles? I mean, what you say is important and everything. Nevertheless imagine if you added some great photos or video clips to give your posts more, "pop"! Your content is excellent but with images and clips, this blog could certainly be one of the very best in its field. Great blog!


Loanhome.hatenablog.com
Autonesia.livejournal.com

Kursi Tamu Mewah said...

Terimakasih atas informasinya, kami juga menjual kursi tamu mewah ganesa yang terbuat dari kayu jati asli. Kursi tamu mewah yang kami produksi adalah sofa mewah yang memiliki bahan baku terbaik. Memang sofa ukir mewah buatan kota jepara memiliki keunggulan kursi tamu mewah jepara yang tidak dimiliki oleh produk kursi tamu mewah lainya. Seperti kursi tamu mewah bellagio yang super elegan.

Moneyplant Research said...

What a jackot call you have given nice work,,
equity tips free trial

Sproter Crati said...

There is noticeably a bundle to know about this. I assume you made certain nice points in features also.

Avenza.com
Information

Sproter Crati said...

There are some interesting points in time in this article but I don’t know if I see all of them center to heart. There is some validity but I will take hold opinion until I look into it further. Good article, thanks and we want more! Added to FeedBurner as well

Click Here
Visit Web

Nino Nurmadi , S.Kom said...

Al Qur'an Keutamaan Doa Nino Nurmadi, S.Kom Nino Nurmadi, S.Kom Nino Nurmadi, S.Kom Nino Nurmadi, S.Kom Nino Nurmadi, S.Kom Nino Nurmadi, S.Kom Nino Nurmadi, S.KomCara Wudhu Nabi Muhammad Saw

bobbyrhodes said...

An interesting discussion is worth comment. I think that you should write more on this topic, it might not be a taboo subject but generally people are not enough to speak on such topics. To the next. Cheers

Home World
Loanhome.hatenablog.com

khadafipernando said...

Your place is valueble for me. Thanks!…

Travelity
Dailysolution.weebly.com

khadafipernando said...

It’s hard to find knowledgeable people on this topic, but you sound like you know what you’re talking about! Thanks

My Trip
Tripnista.xtgem.com

Claytong said...

There are certainly a lot of details like that to take into consideration. That is a great point to bring up. I offer the thoughts above as general inspiration but clearly there are questions like the one you bring up where the most important thing will be working in honest good faith. I don?t know if best practices have emerged around things like that, but I am sure that your job is clearly identified as a fair game. Both boys and girls feel the impact of just a moment’s pleasure, for the rest of their lives.

Dewi Fortuna
Combuzz.weebly.com

khadafipernando said...

There are certainly a lot of details like that to take into consideration. That is a great point to bring up. I offer the thoughts above as general inspiration but clearly there are questions like the one you bring up where the most important thing will be working in honest good faith. I don?t know if best practices have emerged around things like that, but I am sure that your job is clearly identified as a fair game. Both boys and girls feel the impact of just a moment’s pleasure, for the rest of their lives.

Racercare
Scalefair.webs.com

Online Rashan Card said...

Thanks for one of the best weblog.it was very helpful for me.preserve sharing such concepts sooner or later as properly.this was truly what i used to be on the lookout for,and i'm glad to got here right here! Pradhan Mantri Awas Yojana List.

Chand Mason said...

The next time I read a blog, I hope that it doesnt disappoint me as much as this one. I mean, I know it was my choice to read, but I actually thought you have something interesting to say. All I hear is a bunch of whining about something that you could fix if you werent too busy looking for attention.

Sign-ific-ance.co.uk
Information

Nidhi Singh said...

The information i got from this website is truly very correct and helpful.

Stock Broker
Open Equity Trading Account
Open Commodity Trading Account

CorySteeves said...

It’s hard to find knowledgeable people on this topic, but you sound like you know what you’re talking about! Thanks

Thimpress.com
Information
Click Here

Danil Pamungkas said...

Oh my goodness! an amazing article dude. Thank you However I am experiencing issue with ur rss. Don’t know why Unable to subscribe to it. Is there anyone getting identical rss problem? Anyone who knows kindly respond. Thnkx

Completed.com
Information
Click Here

Jackie Austin said...

It’s hard to find knowledgeable people on this topic, but you sound like you know what you’re talking about! Thanks

Visit Web
Studiopress.community
Information

Jackie Austin said...

An interesting discussion is worth comment. I think that you should write more on this topic, it might not be a taboo subject but generally people are not enough to speak on such topics. To the next. Cheers

Visit Web
Studiopress.community
Information

ekoelmer said...

Youre so cool! I dont suppose Ive read anything like this before. So nice to find somebody with some original thoughts on this subject. realy thank you for starting this up. this website is something that is needed on the web, someone with a little originality. useful job for bringing something new to the internet!


Photozou.jp
Information

AugustCollects said...

There are certainly a lot of details like that to take into consideration. That is a great point to bring up. I offer the thoughts above as general inspiration but clearly there are questions like the one you bring up where the most important thing will be working in honest good faith. I don?t know if best practices have emerged around things like that, but I am sure that your job is clearly identified as a fair game. Both boys and girls feel the impact of just a moment’s pleasure, for the rest of their lives.

Io.telkomuniversity.ac.id
Information
Click Here

Robert Howard said...

I discovered your blog site on google and check a few of your early posts. Continue to keep up the very good operate. I just additional up your RSS feed to my MSN News Reader. Seeking forward to reading more from you later on!…

gust.com
Information

ReginaJensen said...

Spot on with this write-up, I truly think this website needs much more consideration. I’ll probably be again to read much more, thanks for that info.


Soundcloud.com
Pearltrees.com

RalphSelton said...

An impressive share, I just given this onto a colleague who was doing a little analysis on this. And he in fact bought me breakfast because I found it for him.. smile. So let me reword that: Thnx for the treat! But yeah Thnkx for spending the time to discuss this, I feel strongly about it and love reading more on this topic. If possible, as you become expertise, would you mind updating your blog with more details? It is highly helpful for me. Big thumb up for this blog post!

About.me
Sourceforge.net

RalphSelton said...

WONDERFUL Post.thanks for share..more wait.

Dcurbanmom.com
Flickr.com

Manila said...

There is noticeably a bundle to know about this. I assume you made certain nice points in features also.

Visit Web
Photigymarket.com
Information

MiltonBaker said...

Very nice post, i certainly love this website, keep on it

Photozou.jp
Trello.com

MiltonBaker said...

An interesting discussion is worth comment. I think that you should write more on this topic, it might not be a taboo subject but generally people are not enough to speak on such topics. To the next. Cheers

Worldcosplay.net
Torgi.gov.ru

ReginaJensen said...

I’m impressed, I must say. Really rarely do I encounter a blog that’s both educative and entertaining, and let me tell you, you have hit the nail on the head. Your idea is outstanding; the issue is something that not enough people are speaking intelligently about. I am very happy that I stumbled across this in my search for something relating to this.

Academia.edu
In.gov

MiltonBaker said...

This really answered my problem, thank you!

Authorstream.com
Linksys.com

Jery Fox said...

This really answered my problem, thank you!

Autodesk.com
Createbb.com

RalphSelton said...

You made some decent points there. I looked on the internet for the issue and found most individuals will go along with with your website.

Vidya.id
Fontshop.com

RalphSelton said...

Youre so cool! I dont suppose Ive read anything like this before. So nice to find somebody with some original thoughts on this subject. realy thank you for starting this up. this website is something that is needed on the web, someone with a little originality. useful job for bringing something new to the internet!

Autodesk.com
Createbb.com

NatalieMason said...

Aw, this was a really nice post. In idea I would like to put in writing like this additionally – taking time and actual effort to make a very good article… but what can I say… I procrastinate alot and by no means seem to get something done.###

Letterboxd.com
Wonderhowto.com

RalphSelton said...

I was very pleased to find this web-site. I wanted to thanks for your time for this wonderful read!! I definitely enjoying every little bit of it and I have you bookmarked to check out new stuff you blog post.

Jonathanlea.net
Inspiredtoreality.com

RalphSelton said...

Youre so cool! I dont suppose Ive read anything like this before. So nice to find somebody with some original thoughts on this subject. realy thank you for starting this up. this website is something that is needed on the web, someone with a little originality. useful job for bringing something new to the internet!

Pbase.com
Gab.com

Haconi Siha said...

You should take part in a contest for one of the best blogs on the web. I will recommend this site!

Bestrip.mystrikingly.com
Information

Haconi Siha said...

You should take part in a contest for one of the best blogs on the web. I will recommend this site!

Nexttravel.siterubix.com
Information

Robert Howard said...

Spot on with this write-up, I truly think this website needs much more consideration. I’ll probably be again to read much more, thanks for that info.

Zomato.com
Information
Click Here
Visit Web

CorySteeves said...

Aw, this was a really nice post. In idea I would like to put in writing like this additionally – taking time and actual effort to make a very good article… but what can I say… I procrastinate alot and by no means seem to get something done.

Edcomm.com
Information
Click Here

Alan Miller said...

There are some interesting points in time in this article but I don’t know if I see all of them center to heart. There is some validity but I will take hold opinion until I look into it further. Good article, thanks and we want more! Added to FeedBurner as well

Pathtounite.org
Information
Click Here

LeviFisher said...

I am often to blogging and i really appreciate your content. The article has really peaks my interest. I am going to bookmark your site and keep checking for new information.

Ocpsoft.org
Information
Click Here
Visit Web

Robert Howard said...

WONDERFUL Post.thanks for share..more wait..

Website
Blogger.com

Robert Howard said...
This comment has been removed by the author.
RalphSelton said...

Hello! I just would like to give a huge thumbs up for the great info you have here on this post. I will be coming back to your blog for more soon.


Wv.to
Website

Abet lenato said...

This is the right blog for anyone who wants to find out about this topic. You realize so much its almost hard to argue with you (not that I actually would want…HaHa). You definitely put a new spin on a topic thats been written about for years. Great stuff, just great!

Information
Visit Site

Palima Daro said...

This is the right blog for anyone who wants to find out about this topic. You realize so much its almost hard to argue with you (not that I actually would want…HaHa). You definitely put a new spin on a topic thats been written about for years. Great stuff, just great!

Click Here
Visit Web
Vlchronicles.com

Chand Mason said...

Youre so cool! I dont suppose Ive read anything like this before. So nice to find somebody with some original thoughts on this subject. realy thank you for starting this up. this website is something that is needed on the web, someone with a little originality. useful job for bringing something new to the internet!

Mcarsradio.org
Information
Click Here
Visit Web

VanesaBell said...

Visit Web
Bolognatrailteam.run
Information

Youre so cool! I dont suppose Ive read anything like this before. So nice to find somebody with some original thoughts on this subject. realy thank you for starting This up. this website is something that is needed on the web, someone with a little originality. useful job for bringing something new to the internet!

RalphSelton said...

Visit Web
Replit.com
Information

Aw, this was a really nice post. In idea I would like to put in writing like this additionally – taking time and actual effort to make a very good article… but what can I say… I procrastinate alot and by no means seem to get something done.###

RalphSelton said...

I was very pleased to find this web-site. I wanted to thanks for your time for this wonderful read!! I definitely enjoying every little bit of it and I have you bookmarked to check out new stuff you blog post.

Click Here
Visit Web
Egghatchnow.com

RalphSelton said...

Information
Click Here
Visit Web

Spot on with this write-up, I truly think this website needs much more consideration. I’ll probably be again to read much more, thanks for that info.

VanesaBell said...

There are certainly a lot of details like that to take into consideration. That is a great point to bring up. I offer the thoughts above as general inspiration but clearly there are questions like the one you bring up where the most important thing will be working in honest good faith.

Visit Web
Cruzroja.es
Information

R1se Hluoluo said...

Vaksin jadi salah satunya kunci pemulihan pariwisata. Kedatangan vaksin diinginkan membuat perjalanan pelancong jadi lebih aman saat pelancong berkunjung tujuan rekreasi.

Semakin cepat vaksin itu diterapkan atau https://pariwisata-indonesia.com/ diterapkan atau disuntikkan sudah pasti akan percepat proses pemulihan di bidang pariwisata,” kata Wawan.

AlbertLee said...

You made some decent points there. I looked on the internet for the issue and found most individuals will go along with with your website.

Starnow.co.uk
Information
Click Here
Visit Web

Dora Shaw said...

Your place is valueble for me. Thanks!…

Creator.wonderhowto.com
Information
Click Here
Visit Web

Miya Williams said...

Thanks for telling us. There is no employment in my city. Kinemaster Diamond

Merry Cris said...

What i do not realize is in reality how you’re no longer actually much more
smartly-favored than you might be now. You are so intelligent.
You know therefore considerably when it comes to this topic, made me in my opinion consider it from a lot of varied angles. Its like women and men are not fascinated until it’s
one thing to do with Lady gaga! Your personal stuffs excellent.
Always take care of it up!

Jasa Pindahan
Jasa Pindahan
Jasa Pindahan
Jasa Pindahan
Jasa Pindahan
Jasa Pindahan
Jasa Pindahan

agen judi online terpercaya said...

nice info and thanks for sharing your opinion

I love porn said...

This is the best pornsite

Tronicles said...

I love viagra

Klay Curry said...

I love viagra

qweqweqwe said...

Buy viagra online

Klay Curry said...

Buy viagra online

Unknown said...

I love viagra

flamemaxindia said...

Cold Display Counter Manufacturer In Delhi
Commercial Cooking Equipment In Delhi
bakery equipment manufacturers in delhi
Planetary Mixer Manufacturers In Delhi

Lillipy said...

Null’s Brawl APK is a modified version which have unlimited money and unlocked all skins for free.

«Oldest ‹Older   201 – 268 of 268   Newer› Newest»