Again: Saving Does Not Increase Savings
I’m reprising a previous (and longer) post here in hopefully simplified and clarified form, for a discussion I’m in the midst of.
“Saving” and “Savings” seem like simple concepts, but they’re not. They have many different meanings, and writers’ different usages and definitions (often implicit or even unconscious) make coherent understanding and discussion impossible — even, often, in writings by those who have otherwise clear understandings of the workings of financial systems.
I’m going to talk about a particular meaning of Saving here: Personal Saving (by households) as defined in the NIPAs. Quite simply, it’s household income minus spending on newly produced goods and services. (It doesn’t include so-called spending to buy already-existing assets like deeds, stocks, bonds, or collectibles like art.) It’s a very different measure from household-sector Gross or Net Saving, which I won’t describe here.
Now think this through with me:
Your employer has $100K in its bank account. You have zero.
Your employer transfers $100K from its bank account to yours to pay you for work. You’ve saved (in the Personal Saving sense).
But is there more Savings in the banks? Obviously not.
Now you buy $100K in goods from your employer, transferring the money from your account to its. You’ve dissaved (spent).
Is there more or less Savings in the banks? Obviously not.
Now say instead that, being frugal, you only transfer $75K to your employer for goods. You’ve “saved” $25K. That’s “Personal Saving” in the NIPAs.
Is there more or less Savings in the banks compared to the first scenario? Obviously not.
When households save money, that (non-)act doesn’t add to the stock of monetary savings (the mythical stock of “loanable funds”).
Thinking about the accounting entries may help explain this. “Saving” is a flow, as opposed to a stock. Every accounting measure must be one or the other. (A flow is measured over a period; a stock is measured at a particular moment.) Saving is an accounting “flow” in that sense, but it doesn’t represent an actual transfer of funds from one account to another. It’s an accounting residual of two sets of actual transfers: income minus expenditures. You could say it’s nothing more than an artificial accounting construct — though a useful one for thinking about balance sheets and flow-of-funds and income statements.
The very essence of Personal Saving, its sine qua non, is that it’s not a transfer of funds between accounts. It’s leaving your money sitting where it is, instead of spending it by transferring it to others. It’s not-spending. (Your transfers between your checking and brokerage account, or your portfolio rebalancing, notwithstanding.)
Since Personal Saving doesn’t transfer anything anywhere, it can’t increase the stock variable, Savings.
What does cause Savings to increase? Spending.
Cross-posted at Asymptosis.
But lets say my boss doesn’t have any money in the bank at all. In fact he is chewing his nails waiting for the check to come in from the people he sold my (our) work to.
The check comes in, and he writes me a check for my work. Both checks reach the bank on the same day. The boss’s account remains at zero, my account increases by the amount of the check. I have saved… until I start paying my bills. The bank can lend the amount of money i have saved… in the aggregate there will be a “net savings” in the bank of unspent money from all workers taken together over time.
The less I spend, and others spend, the more money is available to the bank to lend.
This would be true even if the boss originally did have money in the bank. As soon as he pays my pay and his other bills he has less money in the bank… and before I deposit my check, the bank has less money to lend. But ultimately the amount of money the bank has to lend depends on how much — on aggregate over time — I do not spend.
Now I am not at all sure this is what you are getting at, but it’s the best i can come up with based on your explanation.
ah, but you say, the instant i spend money it goes to some boss’s bank account.
perhaps, but on aggregate there is always going to be some money in the bank, more or less according to how much I spend, or the “boss” spends.
I think if the only thing you look at is the instant in time when money from the boss’s account is credited to my account you have a tautology… which I am not sure is useful.
@Coberly:
there is always going to be some money in the bankS
Error of composition.
Steve Roth
appealing to a logic-book phrase is hardly an explanation.
i don’t know what you are driving at with your saving does not increase savings, but the “fact” that “there is always going to be some money in the banks doesn’t seem to add, or take away, much to (from) the argument.
my contention is… so far… that neither the instantaneous zero net change in savings by cashing the bosses check, nor the “always some money in the bank” says much if anything about “saving does not increase savings.”
i’d be open to an argument that “attempted savings” does not increase “national” savings due to its affect on “business”… something i thought Keynes pointed out and was demonstrated by the Great Depression
but meanwhile, the amount of “savings” in the bank on aggregate would seem to be increased if “on average” people this month left more of their money in the bank rather than spend it… the on average and over at least a measurable period of time and discounting more remote effects on employment and profits… are important. at the least they suggest why the question is not resolved by “instantaneous accounting” or appeals to logic-book excuses for refusing to think about, or explain, what you are talking about.
I should say that I am not so convinced of my own position that you could not convince me of yours with a better argument.
but here is another effort to try to make my position clear:
the “savings” in the economy is not affected by cashing a check.. as you correctly observe. the savings in the economy IS affected by the amount of “income” that each “saver” chooses not to spend over a measurable period of time.
that is… how much of my boss’s check do i leave in the bank, and how much of the boss’s income does he leave in the bank (the check he writes to me is “not-savings” that actually occurred long before he wrote the check while he was incurring the obligation to pay me for my work).
similarly the money i save… do not spend… may reduce the amount of money that other businesses and their employers do not have available to spend or save… but it is the aggregate decisions of all “savers” about how much of their incomes… however affected by other people’s savings decisions… they choose to save.
and presumably “invest” subject to the limits of what the economy can absorb of either “investment” or “savings” (not quite the same thing) before the effects of either inflation or unemployment (of resources) begins to produce the opposite of the intent of the savers/investors.
at some risk to being guilty of talking about more things i don’t know much about, i’d say that your “instantaneous accounting” would predict no change in weather and no possible change in electric current because of “conservation of energy” and failure to consider feedback effects.
@Coberly:
Error of composition means you’re confusing what happens to an individual account with what happens to all accounts.
You’re also making this way too complicated.
If people spend a smaller percent of their income — higher Saving rate — there is the same amount of money in bank accounts (“Savings”). The Savings just circulate more slowly — lower velocity/turnover.
This is just the basic arithmetic accounting, of course. There are many possible economic effects. How does a higher Saving rate affect different people’s incentives, choices, and behaviors (which in turn affect other people’s incentives, choices, and behaviors, ad infinitum)? Different subject.
Steve Roth
thanks for the reply. i am pretty sure i already knew what an error of composition is. i still don’t understand how that applies to “savings.”
The RATE of heat loss is what causes global warming. In any given “reaction” (molecular collision, exchange of radiation) the “amount” of “heat” (energy) is conserved.
i can’t claim the analogy is perfect or even “correct” but i hope it points to what is causing me trouble with your argument about savings.
Cashing your boss’s check, some other boss cashing your check for what you buy from him… these instantaneous “exchanges” obviously result in no change in “savings.” But “saving” is what happens when over a relevant period of time more money stays “in the bank” that could have been “spent” on consumption. Since it could have been spent on “investment”… including the purchase of “capital goods” I am not sure how economists sort it out, but i can’t see where “saving” does not increase “savings” except when secondary effects come into play… as there being no investment market to absorb attempted savings. But I am inclined to guess that even there, the thousand dollars i stuffed into the mattress may count as “savings’ and be useful to me in the depressed economy that follows from people attempting to save when no one wants to invest (more useful to me than the plastic toys i might have bought with it if i wasn’t trying to “save” for hard times)..
that may indeed be making more out of this than you intended.. but that leaves me wondering just what it was you intended to show.
@coberly:
I’m only gonna try this one more time.
“more money stays “in the bank” that could have been “spent””
The point is it all stays “in the bankS” — whether you save it or spend it, whether it’s in your account or someone else’s.
Moving some money from one bank account to another doesn’t change the amount of money in the banks.
So *not* moving it obviously doesn’t.
I have no idea what “could have been” means in your statement. Seems like you’re trying to set up some kind of counterfactual but not getting there.
I have tried mightily to grasp the point of this post.
It seems the OP is trying to convince his readers that the way to increase personal savings is to spend more money. I am way too stupid to understand that, but maybe in a follow-up post he can make it more clear.
Next up, if you really think deeply about it, Cash flow is not a flow, and a positive cash flow does not increase the cash account -though surprisingly expenditures do!
In paragraph 2 you mutter about the use of ill-defined terms.
Then, under the heading “Now think this through with me” you equate money in a bank account with “Savings”. I note that the particular bank accounts that you describe are quite clearly transaction accounts, which means that your undefined term “Savings” does not apply to those accounts.
Then you write:
““Saving” is a flow, as opposed to a stock… But it doesn’t represent an actual flow, or transfer between accounts. It’s a residual of two actual flows…”
The word FLOW as in “stock versus flow” refers to a change (and STOCK refers to the accumulation of changes). The word FLOW as in “stock and flow” has nothing to do with “transfer between accounts”.
If it helps, think of the act of saving as a purposeful transfer from your transaction account to your savings account. Now you have a “transfer between accounts”. And clearly, then, there is flow in both of the meanings that you conflate.
But even if you keep all your money in just one account, if you always withdraw less than you deposit, then your minimum balance will be increasing. Those increases are your FLOW of saving into Savings — even if the saving does not “flow” into some other account.
“The very essence of Personal Saving, its sine qua non, is that it’s not a flow. It’s leaving your money sitting where it is, instead of spending it by transferring it to others. It’s not-spending.”
Keynes said it was more useful to think in terms of spending or not spending, than in terms of spending or saving. I like that. And I think you are trying to say the same thing Keynes said. But you do it by relying on “different usages and definitions” of terms while at the same time rejecting the use of such ill-defined terms, and by calling your stuff “simplified and clarified”.
You do a disservice to your readers.
Steve Roth
sorry we are not getting anywhere.
Roth’s longer post was better written by far than the shorter “clarification”
I summarize his longer post this way: One has to spend money to make money, and one has to make money to be able to save money.
This is true for corporations and entrepreneurial persons, but for most working people the second part is more familiar path, though most working persons invest in education and housing as ways to accumulate wealth.
I do not disagree with the OPs contention that loanable funds theory is largely a myth, but more comment on whether this is a good or bad thing would be useful. The extent that the amount of loanable funds has no or little relation to the amount of lending, leads to the house of cards economy where all is built upon what a handful of persons perceive is the future value of projects which have been funded on money created from nothing. We get booms and we get busts (as an aside: wasn’t the Fed created to stop the boom/bust cycle?) with lots of bad debt whose creation was enabled by the Federal Reserve.
How to achieve a balance where the nation can expand money supply to fuel economic growth, yet is restrained by some mechanism (perhaps interest rates and requiring borrowers to provide down payments) to prevent excessive lending. Excessive in the sense of taking on too much risk in case of an economic downturn in which the expectations for profitability of a great number of projects to go negative turning a mild downturn into a crisis.
We have fooled ourselves into believing there is no risk to the nation’s economic health since the money lent is not “backed” by loanable funds but is instead backed by the Fed (and so is unlimited in nominal dollar terms) which will simply lend more to bail out the banks with each crisis.
Hansberry
thanks. I thought he was trying to get at something. But the “logic” he chose to prove his point wasn’t getting through to me.