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No: Saving Does Not Increase Savings

The misconceptions embodied in this post’s headline sow more confusion in economic discussions than any others.

“Saving” and “Savings” seem like simple concepts, but they’re not. They have many different meanings, and their different usages (often implicit or unconscious) make coherent understanding and discussion impossible — even, often, in writings by those who have otherwise clear understandings of the workings of financial systems.

In short: if you disagree with this post’s headline, you are thinking (perhaps unconsciously) in the “Loanable Funds” model. And the loanable funds model is complete, incoherent bunk. (I’m not even going to bother citing the hundreds of supporting links here, including unequivocal papers from central bank research departments worldwide; Google them.) 

Think this through with me:

Your employer transfers $100K from their bank account to yours to pay you for your work. You’ve saved.

But is there more savings in the banks? More money to lend? Obviously not.

You buy $50K in goods from your employer, transferring the money from your account to theirs. They’ve saved. You’ve dissaved (spent).

But is there more or less savings in the banks? More or less money to lend? Obviously not.

You transfer $50K from your bank to your employer’s, in exchange for $50K in Apple stock or government bonds.

Did you just “save” again? Is there more savings? More money to lend? Obviously not.

When people save up money by spending less than their incomes, they do not add to the stock of monetary savings — the mythical stock of “loanable funds.” Monetary saving does not increase monetary savings.

And since saving up money doesn’t increase the stock (supply) of money, it doesn’t lower the cost (interest rate) of money. On the aggregate level, saving doesn’t “fund” lending. (Banks lend by creating new money ex nihilo if they think they’ll make a profit; that’s what they’re licensed/chartered to do.)

This error and misunderstanding exists partially because there are two ways to “save,” which are widely confuted, conflated, and confused:

Pay people to create real assets — drill presses, houses, ideas, skills, etc. — that you own or have a claim on. Paradoxically, in this case you save by spending.

Increase holdings of financial assets (net of debt) — from dollars to debt securities to Dell stock to CDOs. (It’s much easier to think about this coherently if both dollar bills and deeds are viewed as financial assets: legal constructs designating particular rights or claims on real assets.)

The confution of these two, of course, was all hashed out many decades ago in the Cambridge Capital Controversy — when the MIT/classical Cambridgeans admitted defeat at the hands of the Cambridge Cambridgeans, including acknowledging their central point. (The classicals have proceeded to ignore the whole thing ever since, acting and thinking just as they did before, as if it never happened.)

…the measurement of the “amount of capital” involves adding up quite incomparable physical objects – adding the number of trucks to the number of lasers, for example. That is, just as one cannot add heterogeneous “apples and oranges,” we cannot simply add up simple units of “capital.” As Robinson argued, there is no such thing as “leets,” an inherent element of each capital good that can be added up independent of the prices of those goods.

(This also explains why the the Q in PV=MQ is utterly incoherent: the only unit that can be used to measure Q — dollars — varies with P. It’s like measuring a rubber band using a ruler whose inches vary in length with the changing length of the rubber band.)

People get confused about this partially because “saving” in the national accounts encompasses both real capital created (measured by dollars spent to create it), and net acquisition of financial assets. It’s not what people think it is: a simple sum of everybody’s money saving (income minus expenditures) — not even close.

Here’s how monetary saving happens — aggregate increases in people’s net holdings of financial assets:

People spend money (some of it borrowed from the financial sector), paying people to create real assets. (Purchases of existing real assets can spur creation of new ones — a second-order effect — but the creation’s the thing.)

The market decides that the financial assets that are claims on those assets are worth more than was paid to create the real assets. (Sometimes the market overestimates; this is a problem.)

The people’s debt is unchanged, but their financial assets are worth more. Their net worth has increased. They’ve saved up money. (When the market optimistically bids up financial assets, there’s suddenly, magically, more money.)

Saving (not-spending) money doesn’t increase monetary savings. We saw that obvious reality at the top of this post. Spending (partially enabled by new money creation via bank lending and government deficit spending), coupled with market re-pricing of financial assets, increases monetary savings. This is how the financial system monetizes the accumulated surplus from production.

Since saving money is not-spending, more saving results in there being less savings (relative to the counterfactual of more spending). Or if you must call them this, less loanable funds.

Spending increases savings.

There’s more I’d like to say, but I’ll leave this with a question for my gentle readers:

The IS/LM model seems to be inescapably based on the misconception detailed above — that more saving results in more savings hence, because of supply and demand for loanable funds, lower interest rates.

But: if Krugman’s constantly repeated assertions are correct, that model seems to perform very well.

Why is this true? What am I not understanding?

Cross-posted at Asymptosis.


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Teen employment and minimum wages

by Spencer England

Last week Kevin Erdmann  at the idiosyncratic whisk blog published this chart to demonstrate how minimun wages have caused teen employment to suffer.

It is an interesting chart, but it suffers from the sin of omitted variables.

I constantly see similar charts from those opposing the minimum wage were they seem to assume that nothing impacts teen employment except the minimum wage.  They apparently believe that the business cycle never impacts teen employment or unemployment.   For example, we just suffered the second worse recession in US history that caused adult unemployment to soar.  But in their analysis, the great recession had no impact on teenagers. They claim that the last jump in teen unemployment was entirely attributable to minimum wage increases.

I suggest we look at a different chart that shows three variables:the teen unemployment rate, minimum wages and recessions.

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The 27% Crazification Factor Again

It’s that number again. As noted by Dylan Scott at TPM, according to the latest Pew poll 27% of US adults think that the Republican party “is more willing to work with the other party” than the Democratic party.

For earlier appearances of 27% see Kung Fu Monkey

John: Hey, Bush is now at 37% approval. I feel much less like Kevin McCarthy screaming in traffic. But I wonder what his base is —

Tyrone: 27%.

John: … you said that immmediately, and with some authority.

Tyrone: Obama vs. Alan Keyes. Keyes was from out of state, so you can eliminate any established political base; both candidates were black, so you can factor out racism; and Keyes was plainly, obviously, completely crazy. Batshit crazy. Head-trauma crazy. But 27% of the population of Illinois voted for him. They put party identification, personal prejudice, whatever ahead of rational judgement. Hell, even like 5% of Democrats voted for him. That’s crazy behaviour. I think you have to assume a 27% Crazification Factor in any population.

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The “Decent Life” Argument

I was having a discussion with a conservative friend recently, and challenged him to write up a budget for a decent life for a responsible, hard-working American:

Living in Shoreline, a relatively inexpensive area north of Seattle.

Divorced, two kids.

Not very smart or capable, but has worked hard their whole adult life.

He has so far demurred to do so. Said:

Ahhhhh. “Decent.” Sadly the scarcity red herring rears its head again.

I replied:

This is why I want you to do a budget. Because I think your baseline minimum — “not starving or freezing in the streets” — is Dickensian, cruel, utopian in a very dystopian way, and wildly unrealistic.

With very good reasons, none of us wants a large portion of our population living on that edge. I think you included.

We’re all worse off at that dystopian baseline.

Is there a scarcity of money in America? If that means “not enough for everyone to live a decent life,” no. (Though of course there’s competition for money. Not the same thing.)

I don’t think you understand what you’re really saying:

If income/wealth were less concentrated, inflation would be rampant because demand would be banging against scarce supply of real resources.

But that’s a fundamental misunderstanding of monetary economics, and of scarcity and resources in a modern economy.

In an 80% service economy where many physical goods are produced on demand (basically a service itself):

• The totally dominant “resource” is human effort/work hours/labor. (You know that your theories are are only true in a full-employment economy, right?)

• More spending causes more production (quantity). Close to 1:1. Think massages, and iPhones. If you don’t buy it, it doesn’t get produced. The primary adjustment mechanism is not via price. (The real market is not like the financial markets that way.) It’s via quantity.

IOW, in a market with huge untapped labor resources (limited “scarcity” of “resources”), the quantity elasticity of labor (“resources”) is high.

More spending (demand) causes more production (supply).

Another way to think about it: as the demand curve shifts up, it pulls the supply curve right. Quantity adjusts (mainly), not price.

Higher GDP (and GDP/capita), not higher inflation.

This is not, of course, an argument for perfect equality (don’t try that straw man). We know that would be a dystopia too. Other (i.e. incentive) effects are at play. Lots of moving parts.

But bottom line: in the high-productivity American services economy as it exists, Say’s law is pretty much 180 degrees wrong.

And we haven’t even bolted on lending/borrowing/debt/credit yet, much less fiat money or central banks.

The fundamental notion of scarcity is not the simplistic real-goods/barter-economy thing you think it is.

The policies you promote would result in a return to a more Dickensian society. Exactly what we see in countries with high inequality and small governments. Not a country you want to live in.

Truly, taking America back.

Show me a realistic budget for a decent life for the responsible, hard-working American I’ve described.

And tell me why — if we can have a country where everyone can have that decent baseline, while huge upsides still exist for smart stivers — we shouldn’t do so.

Since you’re so fond of pooh-poohing “fairness” arguments, a reason beyond “It’s not fair to confiscate my money!”

Cross-posted at Asymptosis.

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Is the Permanent income glass half full II

Would you believe one fourth full ? No how about one tenth full ? How about not as dry as the Sahara desert ?

Recently I asked the question. Keynes dismissed the PIH (well before it re-emerged) as follows when discussing consumption in Chapter 8 of The General Theory …

(6) Changes in expectations of the relation between the present and the future level of income. — We must catalogue this factor for the sake of formal completeness. But, whilst it may affect considerably a particular individual’s propensity to consume, it is likely to average out for the community as a whole. Moreover, it is a matter about which there is, as a rule, too much uncertainty for it to exert much influence.

It seems to me that the very very first step in evaluating Keynes’s null is to look at the association between the ratio of consumption to current income and the ratio of future income to current income. If there is anything to the PIH it seems that it must be that a high ratio of consumption to disposable personal income must be correlated with a high ratio of future disposable personal income to current disposable personal income.

Here is a scatter of those ratios


“consinc” is the ratio of US consumption expenditures (PCECA) to US disposable personal income (A067RC1A027NBEA) both from Fred. finc4inc is the ratio of the average of US real disposable personal income (A067RX1A020NBEA) over the next four years (t+1, t+2,t+3 andt+4) to current year real disposable personal income (A067RX1A020NBEA).

The two variables should be possitively correlated if there is anything to the PIH. Now achieved future average real disposable income should be the forecast plus an error term, so the correlation should be well below one. But there is almost nothing there. the main feature of the data is that consumption was low compared to income when consumption was explicitly rationed.

To avoid this, I also looked at data of consumption from 1946 on here


There is no pattern to explain (the correlation is actually slightly negative).

How is it possible that the profession has debated for decades how to improve on the primitive model of consumption as a function of current disposable income to consider the average agents’ consideration of future income when there is no evidence that at all ?

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Did you hear the one about a corporation and a democracy?

Time for a bit of comic relief. (video below the fold)  Julianna reporting on Net Neutrality.  Remember when President Obama said the days of lobbyists setting the agenda was over?

I’m posting this here because this is about “markets”.  It is about competition.  It is about freedom.    The free market competition of…wait for it…IDEAS.  It is not corporations or products that compete they only represent the materialization of what truly is protected in this nation, of what is the singularity within the US Constitution: IDEAS.  Everything, outside of nature its self is derived from ideas.  I was taught this about economics in high school in the early 70’s.  Was I taught incorrectly?


Here’s the thing about ideas competing.  The business model is not the end all and be all for the means by which to determine their value, as some have worked so hard to have society and the world believe.  That an idea can not be immediately or expediently monetized is not determinate of its worth to life and the reduction of the risks of living.

It is not just about the money.

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Paul Krugman is wrong; Obama DOES need to discuss Keynesian economics in his State of the Union address. Here’s why.

Paul Krugman is my hero.  I credit him–him alone, really–with ending, finally, the Peterson Foundation’s capture of almost all of the mainstream news media as their PR outfit.  Just as I credit Occupy Wall Street, also alone, with finally ending the decades-long political prohibition of class warfare by any group but the hedge fund/CEO crowd. Krugman, unlike other liberal economists, thanks to his New York Times column and blog, is not relegated by the news and political worlds to tree-falling-in-a-forest status.  His writings penetrate the barriers–consciousness–that no other liberal economist can.  And he has, single-handledly, removed from the big-name propogandists the freedom to sell their snake oil, unrebutted in any broadly-read forum, as news and fact-based commentary. Krugman bats down this stuff, daily.

The economic/fiscal right is similar to the conservative-legal-movement right, best as I can tell, in its perversion– its Orwellian redefinition–of common language terms and its out-of-the-blue proclamations of false fact. In law, it is words, phrases and concepts such as freedom, liberty, viewpoint coercion, matters of public concern, First Amendment rights to free speech and free association and to petition the government for a redress of grievances, that are now regularly removed from their ordinary meaning to strip or fabricate constitutional rights, depending upon which outcome advances what is at bottom the Reagan-era-right’s legislative agenda.  There is, it is by now clear, no redefinition or fabrication of fact too shamelessly politically opportunistic, or too whiplash-inducing in light of their own recent aggressive rulings to the contrary, that four or five justices won’t adopt, and certainly no limit to the bald silliness that their legal-movement apparatus won’t offer with a straight face.

Freedom means imprisonment.  Or, more precisely, it means being denied access to the federal habeas corpus process after conviction of felonies and sentenced to a long prison term, however rampant the violations of federal constitutional rights, as long as the conviction was in state court, because states, or more accurately, state judicial branches are sovereigns whose dignity must not be offended by the shackles of having to comply with the Constitution’s dictates and prohibitions.  Yes, and work will make you free, as long as the work occurs inside a concentration camp, within a sovereign state.  Or at least it will if you’re a public-sector employee in a unionized job and you are ideologically opposed to big government but not so strongly against it that you will quit your job and ask that your position not be filled upon your departure.  Or if you’re a physician who accepts Medicare patients.  But not if you’re a prosecutor whose discovered bald misconduct on the part of the part of the police in a prosecution, and your own office looks the other way and you complain, since the phrase “big government” does not include within its meaning police misconduct and therefore is not a matter of public concern.

I wish there were a Krugman-equivalent for legal issues.  Without one, these folks dramatically rewrite the Constitution and federal statutes, with rare exceptions entirely off the public’s radar screen.  But there’s not.

But I digress.  I come not just to praise Paul Krugman but also to refute him.  Well, actually to refute his argument today that it’s okay if Obama doesn’t address Keynesian economics in his State of the Union address next week, as long as he addresses, at length, issues of dramatically unequal income and wealth distribution and access to the means of economic mobility.  Krugman recognizes, of course, the relationship between the two, but concludes, citing FDR’s inability to do so in 1937, that the former is almost impossible to accomplish while the latter is easy to do because the public is now very aware of the basic facts and, by large majorities, concerned about it.

Krugman’s purpose is largely to dispute the claim by some liberals that a focus on inequality distracts from an argument for a jobs-creation agenda–that is, an argument for a new economic-stimulus fiscal policy.  He’s right that that is wrong; issues of inequality of income and wealth are anything but a distraction from the sluggish economy.  And, separately, they’re of essential concern.

But a threshold to progress on either of these fronts is victory in this year’s congressional and state-government elections. And therefore, a refutation of the Republican “Obama economy” mantra.

Two weeks ago, in a post I titled “Yes, Speaker Boehner, But WHOSE Policies of the Present Are to Blame?”, I expressed my deep desire to see Obama use his State of the Union Address to point out the dramatic decline in government employment at every level of government–federal, state, local–throughout his presidency, and to show, using charts, how that differs from every economic downturn since the early 1930s.  This is different than a Keynesian argument for economic stimulus. This is easy to explain–both the facts and the economic effects.  If a teacher, firefighter or police officer is laid off, he or she and his or family is spending far less money in the community and the larger economy.  And the layoff may mean the loss of the family’s home.  Federal funds to states and localities has been dramatically reduced since the Tea Party gained control of Congress–a majority in the House, a veto-by-filibuster in the Senate. Compare that to, say, the recession in the early 2000s.

It’s their fiscal policy–and their economy.  And by no means just because of a failure to enact further stimulus programs.  The public needs to be told–and shown–this.  I think it’s important not to conflate stimulus with dramatic reductions in spending. And, with all the respect that Krugman is due notwithstanding, I think that’s what he’s doing.

As for FDR, it seems to me likely that he reversed fiscal course in 1937 not because of public opinion poll results but instead because he, like the public, bought into deficit fears.  But the experience of the 1930s’ double-dip depression, along with the current experience here and in Europe, is not that hard to explain to the public.  FDR’s problem was that Keynesian economics was pretty new territory then, and he wasn’t clairvoyant.  He made the same mistake that Obama made.  He bought the wrong sales pitch.  Understandable in 1937, but not so much these days.

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The Ultimate Transparency for Capitalism

Barry Ritholtz is talking about the Bull market coming to an end. It is no surprise to me. My equations of effective demand may finally be cracking the code of the business cycle. But I want to say that knowing where the business cycle ends is the ultimate transparency in capitalism.

Barry, as usual, makes intriguing comments…

“Why the sudden shift, from excess bullishness and exuberant expectations of more double-digit gains, to a recognition that perhaps the party won’t go on forever? You humans seem to desperately search for a simple narrative that explains complex events of unknown causation.”

Yes, the question sounds forth… “What the heck is happening?” The answer is quite simple. The effective demand of the economy is showing its constraints. Labor share has fallen so much that we will not return to what used to be considered full employment. This limit could have been known years ago as the recovery was taking shape.

He concludes…

“Hence, a correction is not simply the random meanderings of a complex system comprised of the buying and selling activities of millions of participants, but rather must have been caused by stocks that were too pricey, or earnings that have not lived up to expectations, or the development of big trouble in China. The problem with these rationalizations is that all of these things were well understood by markets — and have been for some time. None are surprises, and none reflect information that is new or was especially unknown previously.”

Not everything was well understood by the markets. They did not understand the effect of a falling labor share. Economists don’t even understand it. Markets thought that lower wages would raise competitiveness and thus increase economic potential. No… they were wrong. Lower labor share constrains production. Economists haven’t even adjusted potential GDP yet.

If it was common knowledge where the business cycle ended, there would be less surprises, . Markets would be less volatile, less disturbing. Stock prices would be more reasonable.

The United States though is reaching the end of its business cycle. I have said that in 2014, stock markets will occasionally fall and then rebound some, until eventually they just keep falling. That is a normal pattern near the end of a business cycle, as many are led to believe there is a tremendous upside… when really there isn’t.

Society as a whole would function better if markets had a wisdom of when the business cycle ends. Actually it would be easier to maintain output at a sustainable level. So much craziness and delusion would go away.

A clear understanding of the effective demand limit upon the business cycle would be the ultimate transparency for capitalism…

and Dare say… capitalism itself would function better…

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