Economics - Savers vs Spenders and economy

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2comma
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Economics - Savers vs Spenders and economy

Post by 2comma »

We often hear we don't save enough as individuals in the US compared to some countries and we hear we spend too much. I'm just wondering what do economists say happens, long and short term, if most Americans changed and started to save in a big way, and spend less? What would happen if most of us savers decided to become big spenders and save less? Does saving ultimately decrease investment costs making businesses more profitable or do more people spending help the economy. I'm a saver, no ax to grind and no political agenda here I'm just wondering if there is any research that supports a saving over a spending citizenship if all other variables were removed from the equation? I'm thinking that countries that save more ultimately do better but I'm sure there are so many variables in play that this may not matter for a country's economy in general? Certainly, those of us that save (LBYM) and invest are better off than the average. I just wonder if it has any effect on the economy overall?
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Re: Economics - Savers vs Spenders and economy

Post by totallystudly »

In the short run, it would be borderline Armageddon. In the long run, we are all dead and things work themselves out.

If consumer spending patterns changed from say a 5% to a 6%, I'd expect GDP to drop something like .66-1%, which would put our already anemic GDP growth just above 1% or so. The goal is 3% or so for GDP growth, so 1% would be concerning. Our economy is based mostly on consumption, about 2/3rds of it, so that savings has to come from consumption.

Savings increases capital for investment, which helps in the long run, but in the short run, spending and GDP growth is what matters.
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Maynard F. Speer
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Re: Economics - Savers vs Spenders and economy

Post by Maynard F. Speer »

Savers are very important to the economy too, of course .. Your bank savings aren't just sitting there, but rather being lent to people to buy houses and start new businesses, and they're lent to governments to manage debt and invest in the economy

I think it's a bigger worry at the moment that we've killed off savings culture, and economies are going to have to try and function without big savings pools
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes
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Re: Economics - Savers vs Spenders and economy

Post by JoMoney »

There is a theory of The Paradox of Thrift , but I believe it eventually has to come to an equilibrium, although it may be a bumpy road.
We must save to invest in the capital resources we use to produce for the economy. If we are saving then it means we have income from which to save a portion of. If we are receiving income it means we're doing something productive in the economy that others are willing to exchange value for. But if we save a portion of that income it is no longer available as income elsewhere in the economy, if income is reduced then savings will also be reduced until we reach a point of equilibrium of savings/spending that the economy can support.
John Maynard Keynes wrote:For although the amount of his own saving is unlikely to have any significant influence on his own income, the reactions of the amount of his consumption on the incomes of others makes it impossible for all individuals simultaneously to save any given sums. Every such attempt to save more by reducing consumption will so affect incomes that the attempt necessarily defeats itself. It is, of course, just as impossible for the community as a whole to save less than the amount of current investment, since the attempt to do so will necessarily raise incomes to a level at which the sums which individuals choose to save add up to a figure exactly equal to the amount of investment.
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Re: Economics - Savers vs Spenders and economy

Post by Valuethinker »

The paradox of thrift is very real. Look at Europe right now. Germany runs a current account surplus, but the Eurozone peripheral economies cannot be financed and sit in a below full employment equilibrium.

The US does not exist alone in world capital markets. If a country runs a current account deficit, then it is (by definitional relationship) funding some of its capital spending from foreign savers, and vice versa.

If US citizens become bigger savers then someone else has to spend more. Note Americans invest a lot in housing equity, and a lot in higher education--neither of these show up as 'investment' in terms of GDP stats (they show up as consumption) but they are surely investments from the perspective of those making them.

Note that Japan in the 1980s and 90s, and China right now, shows the perils of investing when the marginal productivity of that capital is less than 0. Translation: empty cities in the deserts, high speed trains no one uses, wind farms that can't get grid connections, zombie companies and zombie steel mills that produce with no realistic way of recouping the investment.

Europe right now you have everyone being thrifty because they are afraid of unemployment. And being too scared to invest-- hence the Italian/ Spanish/ Greek slumps.

This, Keynes called 'the Liquidity Trap'. We live in a world where interest rates cannot fall enough to make supply of capital = demand for capital, that would require a negative rate of interest. If we had higher inflation we could achieve that via negative real interest rates. Negative nominal interest rates however are damned hard to construct (Switzerland is trying). Imagine a world where the government charges the investor interest for holding their bonds?
Last edited by Valuethinker on Mon Jul 27, 2015 8:38 am, edited 1 time in total.
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Re: Economics - Savers vs Spenders and economy

Post by Valuethinker »

Maynard F. Speer wrote:Savers are very important to the economy too, of course .. Your bank savings aren't just sitting there, but rather being lent to people to buy houses and start new businesses, and they're lent to governments to manage debt and invest in the economy

I think it's a bigger worry at the moment that we've killed off savings culture, and economies are going to have to try and function without big savings pools
World interest rates are at their lowest in history, lower, even, than in the 1930s (for this length of time).

This is pretty strong evidence that the demand for capital for investment is weak (business fixed capital formation stats tell a similar story). If the price of something slumps, it is a sign that quantity supplied exceeds quantity demanded. The price of capital is the interest rate (all financial assets are priced off the risk free bond yield).

The supply of savings right now exceeds the demand for it. We are stuck in a Keynesian liquidity trap, a below full employment equilibrium. As China slumps, this is now pretty much global (US doing OK, but hardly bullish).
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Re: Economics - Savers vs Spenders and economy

Post by bberris »

Maynard F. Speer wrote:Savers are very important to the economy too, of course .. Your bank savings aren't just sitting there, but rather being lent to people to buy houses and start new businesses, and they're lent to governments to manage debt and invest in the economy

I think it's a bigger worry at the moment that we've killed off savings culture, and economies are going to have to try and function without big savings pools
You have it backwards. Bank lending creates bank deposits. Bank lending is limited by bank capital ratio, not deposits.
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Re: Economics - Savers vs Spenders and economy

Post by bottlecap »

The real answer is that saving and spending are two sides of the same coin. The key is saving (and investing) wisely and spending wisely. If you save and put it under the mattress (unwise) you simply defer doing anything useful with the money. If you invest it wisely, that money gets put to use creating growth. It's similar with spending. If you blow your money unwisely, you waste it. If you spend it wisely, you create growth. Of course, with spending, you are almost presumed to spend it wisely, so we'd mainly be speaking of government spending.

In the end, this means the spending/saving debate isn't much to concern yourself with. Thankfully, you don't need economists to have a growing economy. If we did, we'd be in trouble!

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Re: Economics - Savers vs Spenders and economy

Post by rca1824 »

totallystudly wrote:In the short run, it would be borderline Armageddon. In the long run, we are all dead and things work themselves out.

If consumer spending patterns changed from say a 5% to a 6%, I'd expect GDP to drop something like .66-1%, which would put our already anemic GDP growth just above 1% or so. The goal is 3% or so for GDP growth, so 1% would be concerning. Our economy is based mostly on consumption, about 2/3rds of it, so that savings has to come from consumption.

Savings increases capital for investment, which helps in the long run, but in the short run, spending and GDP growth is what matters.
No that's not quite right. Private GDP is production of consumer goods + capital goods (C + I). When people save more, the decrease in production of consumer goods is offset by the increase in production of capital goods. GDP is unaffected in the short run, ignoring transitional frictions that might temporarily lower productivity as factories retool. Then in the long run, the greater supply of capital goods increases total production and hence GDP.

You probably meant to say "consumption would drop" not "GDP would drop". Consumption would indeed drop in the short run because people are saving more. Then in the long run consumption would grow to surpass its current level due to the abundance of total production.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB
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Re: Economics - Savers vs Spenders and economy

Post by Valuethinker »

rca1824 wrote:
totallystudly wrote:In the short run, it would be borderline Armageddon. In the long run, we are all dead and things work themselves out.

If consumer spending patterns changed from say a 5% to a 6%, I'd expect GDP to drop something like .66-1%, which would put our already anemic GDP growth just above 1% or so. The goal is 3% or so for GDP growth, so 1% would be concerning. Our economy is based mostly on consumption, about 2/3rds of it, so that savings has to come from consumption.

Savings increases capital for investment, which helps in the long run, but in the short run, spending and GDP growth is what matters.
No that's not quite right. Private GDP is production of consumer goods + capital goods (C + I). When people save more, the decrease in production of consumer goods is offset by the increase in production of capital goods. GDP is unaffected in the short run, ignoring transitional frictions that might temporarily lower productivity as factories retool. Then in the long run, the greater supply of capital goods increases total production and hence GDP.

You probably meant to say "consumption would drop" not "GDP would drop". Consumption would indeed drop in the short run because people are saving more. Then in the long run consumption would grow to surpass its current level due to the abundance of total production.
the process you are describing was precisely that which led to stagnation in the 1930s, and in Japan more recently. A Keynesian "trap" where the economy settles below full employment equilibrium-- desired savings exceed desired investment and consumption.

Note the way we got out of it then was to stage the biggest bonfire of economic value ever made: World War 2. Make vast amounts of machines and ammunition, burn it up, rip up 2 continents, destroy 90% of the buildings in Tokyo region, kill 100m+ human beings. Then, when it's over, scrap 90% of what you have built- -wipe out all that investment. Stage a baby boom, give the money to the vanquished to rebuild, run a 40 year arms race called The Cold War, and have the longest stretch of continuous human prosperity in history. If you forget about Auschwitz, Coventry, Dresden, Hamburg, Tokyo, Nanjing, Stalingrad, Warsaw, Hiroshima, Nagasaki then it was great economics.

You are assuming positive marginal return on capital investment. But in fact that investment can become value destroying.

Japan and China have both probed the limits of that, as did Thailand and the other SE Asian economies up to 1998. Empty cities in the desert. High speed trains that are too expensive to be used. Steel mills and factories with no customers.

It's easy to see how the US could spend another 1-4% of GDP on better roads and bridges, airports, high speed trains, urban light rail, national electricity grid strengthening, etc. But 10%? Not likely. For the US, which is at the bleeding edge of technological innovation, successful investment requires "smarts"-- the factors Solow identified so long ago which account for the vast percentage of economic growth (ie NOT the formation of physical capital).

Education for example is "consumption" in GDP terms. Yet it's clear the education of the workforce plays a huge role in determining its productivity and future standards of living.
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Re: Economics - Savers vs Spenders and economy

Post by rca1824 »

Valuethinker wrote:
rca1824 wrote:
totallystudly wrote:In the short run, it would be borderline Armageddon. In the long run, we are all dead and things work themselves out.

If consumer spending patterns changed from say a 5% to a 6%, I'd expect GDP to drop something like .66-1%, which would put our already anemic GDP growth just above 1% or so. The goal is 3% or so for GDP growth, so 1% would be concerning. Our economy is based mostly on consumption, about 2/3rds of it, so that savings has to come from consumption.

Savings increases capital for investment, which helps in the long run, but in the short run, spending and GDP growth is what matters.
No that's not quite right. Private GDP is production of consumer goods + capital goods (C + I). When people save more, the decrease in production of consumer goods is offset by the increase in production of capital goods. GDP is unaffected in the short run, ignoring transitional frictions that might temporarily lower productivity as factories retool. Then in the long run, the greater supply of capital goods increases total production and hence GDP.

You probably meant to say "consumption would drop" not "GDP would drop". Consumption would indeed drop in the short run because people are saving more. Then in the long run consumption would grow to surpass its current level due to the abundance of total production.
the process you are describing was precisely that which led to stagnation in the 1930s, and in Japan more recently. A Keynesian "trap" where the economy settles below full employment equilibrium-- desired savings exceed desired investment and consumption.

Note the way we got out of it then was to stage the biggest bonfire of economic value ever made: World War 2. Make vast amounts of machines and ammunition, burn it up, rip up 2 continents, destroy 90% of the buildings in Tokyo region, kill 100m+ human beings. Then, when it's over, scrap 90% of what you have built- -wipe out all that investment. Stage a baby boom, give the money to the vanquished to rebuild, run a 40 year arms race called The Cold War, and have the longest stretch of continuous human prosperity in history. If you forget about Auschwitz, Coventry, Dresden, Hamburg, Tokyo, Nanjing, Stalingrad, Warsaw, Hiroshima, Nagasaki then it was great economics.

You are assuming positive marginal return on capital investment. But in fact that investment can become value destroying.

Japan and China have both probed the limits of that, as did Thailand and the other SE Asian economies up to 1998. Empty cities in the desert. High speed trains that are too expensive to be used. Steel mills and factories with no customers.

It's easy to see how the US could spend another 1-4% of GDP on better roads and bridges, airports, high speed trains, urban light rail, national electricity grid strengthening, etc. But 10%? Not likely. For the US, which is at the bleeding edge of technological innovation, successful investment requires "smarts"-- the factors Solow identified so long ago which account for the vast percentage of economic growth (ie NOT the formation of physical capital).


That's not quite right wars don't grow the economy it's only an illusion because when you destroy capital you increase the marginal product of capital but you are still worse off than if the war had never happened. I think you've been reading a lot of Keynesian nonsense that has confused your thinking about economics. I would recommend reading more Austrian theory to see the other side.
Education for example is "consumption" in GDP terms. Yet it's clear the education of the workforce plays a huge role in determining its productivity and future standards of living.
This is the difference between accounting and economics. Accountants call education consumption in GDP but economists call education investment in human capital. Let's stick to economics not accounting.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB
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Re: Economics - Savers vs Spenders and economy

Post by Valuethinker »

rca1824 wrote:

That's not quite right wars don't grow the economy it's only an illusion because when you destroy capital you increase the marginal product of capital but you are still worse off than if the war had never happened. I think you've been reading a lot of Keynesian nonsense that has confused your thinking about economics. I would recommend reading more Austrian theory to see the other side.
I was slightly teasing re WW2-- pointing out that a massive consumption pulse (albeit in capital and "consumer" goods like tanks that are worthless to the rest of the economy) led to full employment.

The serious point was that a surplus of savings is not "self correcting". Not at all-- you can get stuck in sub full employment equilibrium.

I would recommend that you go back and read Keynesian economics-- all that Austrian economics has confused your thinking. Austrian economics is a cult, that has never had much traction in mainstream economics-- instead you get to Real Business Cycle theorists etc. And I think the recent record of Keynesian economics is rather superior to the RBC stuff. You don't even need neo Keynesian economics, just Keynesian.
Education for example is "consumption" in GDP terms. Yet it's clear the education of the workforce plays a huge role in determining its productivity and future standards of living.
This is the difference between accounting and economics. Accountants call education consumption in GDP but economists call education investment in human capital. Let's stick to economics not accounting.
[/quote]

Since we were talking about what would happen to the economy (ie GDP) if savings went up, I'll stick with the definitions that economists use. Education is counted in consumption in GDP, not in fixed capital goods formation ("investment"). Yet Solow (and everybody post Solow AFAIK) is pretty clear that capital accumulation is only a small part of GDP growth. You can't save your way to a higher growth rate (you can if you were at the economic development stage of say China 20 years ago, or India now, assuming you can overcome all the institutional barriers to making profitable capital investments. The history of the USSR tells you that just investing lots in new factories and buildings doesn't necessarily lead to rising productivity and GDP Per capita).
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Re: Economics - Savers vs Spenders and economy

Post by rca1824 »

Valuethinker wrote:
rca1824 wrote:

That's not quite right wars don't grow the economy it's only an illusion because when you destroy capital you increase the marginal product of capital but you are still worse off than if the war had never happened. I think you've been reading a lot of Keynesian nonsense that has confused your thinking about economics. I would recommend reading more Austrian theory to see the other side.
I was slightly teasing re WW2-- pointing out that a massive consumption pulse (albeit in capital and "consumer" goods like tanks that are worthless to the rest of the economy) led to full employment.

The serious point was that a surplus of savings is not "self correcting". Not at all-- you can get stuck in sub full employment equilibrium.

I would recommend that you go back and read Keynesian economics-- all that Austrian economics has confused your thinking. Austrian economics is a cult, that has never had much traction in mainstream economics-- instead you get to Real Business Cycle theorists etc. And I think the recent record of Keynesian economics is rather superior to the RBC stuff. You don't even need neo Keynesian economics, just Keynesian.
Education for example is "consumption" in GDP terms. Yet it's clear the education of the workforce plays a huge role in determining its productivity and future standards of living.
This is the difference between accounting and economics. Accountants call education consumption in GDP but economists call education investment in human capital. Let's stick to economics not accounting.
Since we were talking about what would happen to the economy (ie GDP) if savings went up, I'll stick with the definitions that economists use. Education is counted in consumption in GDP, not in fixed capital goods formation ("investment"). Yet Solow (and everybody post Solow AFAIK) is pretty clear that capital accumulation is only a small part of GDP growth. You can't save your way to a higher growth rate (you can if you were at the economic development stage of say China 20 years ago, or India now, assuming you can overcome all the institutional barriers to making profitable capital investments. The history of the USSR tells you that just investing lots in new factories and buildings doesn't necessarily lead to rising productivity and GDP Per capita).
Kind of defeating the point then if you want to rely on a simple accounting trick. Education is for all intents and purposes investment, regardless what official accounting says it is. You're really just relying on semantics and not true principles. The real question anyway was whether savings increases investment in future GDP. When people save interest rates get bid down. When interest rates get bid down, students take out more loans to buy education and businesses take out more loans to finance capital investment. So both channels increase future GDP. The only way it wouldn't be if people started to forego education to save more but then that's kind of an aside because we are really concerned with non-education as consumption henceforth for all purposes.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB
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Re: Economics - Savers vs Spenders and economy

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