Comments on Employment, Interest, and Money: Investment Makes Saving Possible

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Interesting approach. I think saving causing inve...

2012-01-12T12:16:14.072-08:00

Interesting approach.

I think saving causing investment or vice versa is odd.

The loanable funds approach (or my version of it) is that at the natural interest rate, the flow of saving matches the flow of investment. It isn't that one causes the other. The interest rate coordinates them.

The timing issues (all income is saved for an instant) is not much more interesting that pointing out that the market for bread doesn't involve shoppers picking up the bread as it comes out of the oven.

There is no doubt (in my mind) that monetary disequilibrium) means that the market prices and yields of financial assets don't necessarily generate an interest rate that keeps saving and investment equal. While that is certainly implicit in your discussion, I think it should be front and center.

I do think that scarcity of resources and the allocation between consumer goods and capital goods is what is fundamental. Do market prices, and particularly the interest rate, coordinate individual decisions to save or invest consistent with that reality? But is that much different from relative product prices coordinating consumption and production in the face of valuations of the goods and opportunity costs following from scarcity.

Does demand cause supply? Or supply cause demand? Or is it prices that coordinate (or not) demand and supply?

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Right, Piper, Deficit spending increases net fina...

2010-09-29T05:46:33.718-07:00

Right, Piper,

Deficit spending increases net financial assets of the private sector, also known as nominal savings.

But real savings is the accounting record of real investment.

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2010-03-23T04:35:46.699-07:00

Thank you I enjoyed reading this post and it helped me gain some insight on this topic.

But, (most) government deficit spending is neither...

2010-02-04T17:04:40.164-08:00

But, (most) government deficit spending is neither investment nor savings.

(It is "forced consumption," or "waste.")

Although they overlap, we may distinguish "investment" and "savings" (I'm redefining those terms a bit here).

Both involve postponed consumption. Pure "savings" is simple stockpiling. In a robust economy pure savings aren't very attractive, because of the generally-negative return over time due to storage cost and spoilage plus opportunity cost and depreciation. Besides those costs, stockpiling goods is risky because of volatility in commodity prices. So many people try to stockpile "money" (the "most liquid good"). That's a good bet only if the fiat-money issuer refrains from diluting the currency. A pure saver simply wants to defer his consumption of present goods, perhaps as a hedge against a future drop in income (absolute or relative).

"Investment" means consumption in support of production. Think of buying an espresso machine in order to use it in a coffee shop. If things go well, the "investment" in the factory [capital] complemented with labor (purchased/consumed, by/in the factory) will move some goods from lower- to higher-valued uses (from raw to finished state), producing a surplus.

Investment involves greater (or less predictable) risk than stockpiling, but it is clearly different than consumption. You can either buy and eat a sumptuous dinner today, or buy an espresso machine for your coffee shop, hoping you'll end up able to buy and eat more than one sumptuous dinner in the future.

People often call speculating in commodities "investment" and even investments in production may overlap with commodity speculation (given volatility in prices for raw and finished goods, not to mention labor and capital goods), but I still think it proper to recognize the base cases, because:

Most government spending (and therefore most deficit spending) is pure consumption-- buying sumptuous dinners for bureaucrats and cronies. Tomorrow there'll be nothing left but icky brown sludge.

Now, someone buying T-bills may think he is "investing," but unlike a business selling stock or bonds the government doesn't actually propose to do anything productive with borrowed money (so the T-bill owner's only hope of repayment lies in the government confiscating surplus from someone else). Really, the T-bill buyer's stockpile of bonds comes with severe spoilage risks.

What about someone who doesn't buy T-bills. That is, someone who saves (stockpiles) cash? Whether he stores it in a bank or under a mattress he suffers severe spoilage as well, because the government dilutes him by printing extra money. Sure the government spends that money, but not on "investment," only consumption. From the point of view of the cash saver, the government confiscates (through dilution/inflation) and wastes (pure consumption) part of his savings.

That is why government cannot actually increase savings by running a deficit. The government can only decrease savings by spending more (unless it does a heretofore unknown thing, and invests in production...).

But, some people say, the government deficit matches private savings in a big macro equation. The more the government borrows, the more the private sector saves. I say that's only true if (a) we're talking nominal rather than real money, and (b) we make the baseless assumption that the government will (even could) pay back what it borrows by some means other than confiscating private savings (stockpiles or the present value of investments) in an amount equal to what the government owes.

So far as I can see, government deficit spending can (pretty much) only harm the real economy, so it exacerbates, not relieves, general economic distress.

Thank you; I enjoyed reading this post and it help...

2009-11-30T06:04:17.978-08:00

Thank you; I enjoyed reading this post and it helped me gain some insight on this topic.

It seems to me that what drives the investment rate at any point in time is simply the opportunities for profit that people perceive and the interest rate. If people perceive a way to make a 25% return they will find some way to raise the money to spend on investment regardless of the current savings rate, and the only thing that would dissuade them is a 25% interest rate. Conversely, if people perceive low profits (say 3% rate of return) in all available opportunities they will only spend money if interest rates are even lower, regardless of the saving rate.

Fully agreed. Loanable funds applies only to fixe...

2009-11-28T00:36:20.913-08:00

Fully agreed.

Loanable funds applies only to fixed fx regimes such as a gold standard, where lending is necessarily continuously reserve constrained.

With non convertible currency/floating fx banking is inherently not reserve constrained and the concept of loanable funds is inapplicable.

see 'Soft Currency Economics' at
www.moslereconomics.com

and other 'mandatory readings'

Arnold, perhaps there is some confusion because I ...

2009-11-24T08:15:47.630-08:00

Arnold, perhaps there is some confusion because I use the word "savings" (as per convention) to refer both to the stock of savings and to the flow of saving (over some non-infinitessimal period of time). But I think I was precise about it. If you read everything in context, I don't think there is any ambiguity as to when I'm talking about stocks and when I'm talking about flows.

The main story is about flows, as the first 4 words of the post should make clear. But flows are defined in terms of stocks: a flow is merely a change in a stock. So once I start to get concrete, there's not much I can say about flows without also talking about stocks: when you receive income, you immediately create a flow of savings, because that income becomes part of your stock of savings; when you spend it, you create a negative flow of savings, because you take money out of your stock of savings.

Regarding physical output vs. financial representations, I don't see how saving can be seen in terms of physical output. Usually, people don't save physical output; they save money. (The down payment on a house would be an exception, but most savings take the form of money or financial assets.) In the national accounts, there is no natural deflator for savings. Investment can be imagined in either in physical or financial terms, but saving is purely financial.

Your discussion frequently mixes stocks with flows...

2009-11-24T06:44:10.781-08:00

Your discussion frequently mixes stocks with flows. I am used to think of saving and investment as flows, that is as amounts per unit of time. I am also used to thinking of them in terms of physical output, not financial representations.