Not Spending is Not Investment
I see this logical error so constantly, almost every day, that I feel the need to reiterate. Personal saving, virtuous and useful as it is for individuals, does not increase investment. This is what I call the “lump of money” fallacy (a.k.a. the loanable funds model).
If you transfer $10K from your bank account to mine for a vacation package (spend), do the banks have more money to lend for investment?
If you don’t transfer the $10K to my account (save), do the banks have more money to lend for investment?
In which scenario am I more likely to invest in cabaña improvements? In which scenario will my employees produce more massages?
A huge amount of the thinking you see out there re: spending, saving, consumption, and investment is crippled by this simple error of composition.
“Saving” Versus Saving for the Future
Cross-posted at Asymptosis.
The error is so common and automatic that it is almost one word in media and perhaps in people’s minds….always worth reminding readers of such a basic idea.
I always wondered why there was so much complaint about the low US savings rate. Maybe we need a real tax on savers to encourage spending an investment.