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.