Tuesday, January 18, 2011

The Desire to Save

Take another look at at what Winterspeak said, from mine of the 15th:

The desire for the non-govt sector to save changes. It is the exogenous variable.

The "desire to save" changes. The most interesting thing about this is how often we hear about the desire to save, from MMT people who seem to treat it as sacrosanct.

Here's Bill, from the Billy Blog, from the 12th:

...the government can try to reduce its deficit by cutting net spending [but] if this runs, for example, against the desires of the private domestic sector to increase their saving ratio ... then the government’s aspirations will be thwarted.

And here's Tschäff, from a comment back in November:

We can say that given the savings desires of the world for dollars, there aren't enough dollars to satisfy that desire without causing people to cut back on their spending...

Three quotes, just off the top of my head. Tschäff sees savings desires as a given. Billy says the success of government deficit reduction depends on private-sector saving patterns. Winterspeak says saving desires are an "exogenous variable" -- they are a given, and they change.

The "desire to save" is not "exogenous." It is not a given. The desire to save is influenced by economic conditions and therefore is a consequence of economic policy.

As economic conditions worsen, the desire for economic security grows. Those who can afford to increase their saving, do. As for the rest of us, our "desire" to save increases as well, though our ability to save may not.

All right, so maybe making economic conditions worse isn't really one of the goals of policy. Conditions are still the consequence of policy. And that means policy is responsible for the growth of savings.

This graph is my look at savings. The trend line shows how much money we have in savings, compared to the money we have for spending. When the trend line goes up, savings is increasing faster than spending-money. When the line goes down, spending-money is increasing faster.

The graph shows savings growing faster from 1915 to the Great Depression... spending-money growing faster from the end of the Great Depression to the end of World War II... and savings growing faster after the war.

This graph is based on numbers from the 1975 "Bicentennial Edition" of the Historical Statistics. Somewhere among my Lost Papers, there is a hand-drawn version of this graph, from the late '70s or early '80s. Since that time I have understood that the uptrend leads to Depression, the downtrend accompanies recovery, and the uptrend accompanies growth -- but then leads again to economic troubles.
By 1977, when I took macro, the economy was already in trouble.
Our so-called "golden age" -- 1947 to 1973 -- occupies the post-war uptrend shown on the graph. But by the last years shown, you can see the uptrend tapering off just as it did during the Depression. We squeezed out only a few more good years before that golden age ended.

After that, economic growth wasn't so good anymore. That's when the Laffer Curve, the Two-Santa-Claus Theory, and supply-side economics, and Reaganomics arose, and lots of other trendlines started changing.

Among the changes intended to boost growth was the 401(k) savings plan created in 1978. In later years we find:

...among other policies and proposals designed to encourage saving. Every such policy that is put into place, of course, is good not only for savers but also for the economy itself, because it makes credit available for growth.
...or, it is generally thought to be good for the economy.
The MMT guys I quoted above would probably say the saving was not necessary, because banks can create loans without it. Doesn't matter. Policies were put in place. Saving was enhanced.

This graph is an update of the savings graph above. The blue trendline way down low shows the same data as the graph above. The red trendline is newer data.

There is a significant mismatch in the numbers, so the red and blue lines don't line up. But the red line definitely continues and extends the uptrend that began after World War II.

I made this graph an odd shape to give the old, blue line the same shape it has in the graph above. So you can see that saving increased a lot after the golden age ended in 1973.

Was all of this increase in savings -- an astonishing increase, really -- the result of policy encouraging people to save? Not likely. The increase was the result of direct policy actions like the 401(k) and indirect policy effects like the increased desire for economic security arising in response to a less-than-golden economic performance.

The point of all this is that the desire to save is not a "given." It is a response to policy and to economic conditions which are themselves a response to policy.

Mostly, a response to bad policy.

There is no reason to pretend that the desire to save is sacrosanct. I don't know why MMT people engage in such pretense.


The Arthurian said...

The graphs show the "balance" between money in savings and money in circulation. When the trendline reaches an extreme, there is monetary imbalance.

At the low extreme there is too much money chasing too few goods, and you get "demand-pull" inflation; but growth is good.

At the high extreme there is too much credit in use, the factor-cost of money is high, and you get "cost-push" inflation; and growth is not good.

Greg said...

How do you think your analysis squares with these impressions of mine?;

I've felt for some time that one of the problems we face is that much of what we are told is "saving" is actually consuming of a different type of product, a financial product. When we open a 401 k and buy stocks on a secondary market, not IPOs, we are in fact "spending" and NOT saving. Saving would be putting money under a mattress or cookie jar or in a govt bond or (insured) bank CD. So we have created the "financial products division" of the USA and its customers simply spend some of what they dont spend on their staples of living on their products.

Now this can be all well and good as long as there is full disclosure of this fact but we are led to believe that we are investing in our companies when we buy a stock on the secondary market when in fact we are not. We are just playing in a Goldman Sachs run casino. We are led to believe that when I buy Fords stock from someone else I'm helping Ford. Which of course is not true. This isnt to say that Ford does not benefit from the appearance of higher stock prices BUT many of the things Ford might do to help its stock prices short term like cut jobs and wages will often end up destroying itself, especially when ALL companies engage in the same practice.

Saving is good, to a degree, and using Wynne Godleys sectoral analysis its absolutely true of the private sector that in order for it to net save (in the currency of issue) for a given period, the public sector must run a net deficit (unlesss we net export)

Where do you think "Net savings" falls in this graph of yours? The amount we've saved minus the amount we owe in private debt?

It seems to me that much of our debt has "shown up" in savings. Borrowing to buy stocks. Getting a second mortgage to invest in the latest get rich quick scheme your buddy has.

What do you think?

The Arthurian said...

It seems to me that much of our debt has "shown up" in savings. Borrowing to buy stocks. Getting a second mortgage to invest in the latest get rich quick scheme your buddy has.

I think it's a "meme" or something. People see other people doing it, and want to get in on the money-making. And then this cultural component is supported by a rich tapestry of financial innovation. And the financial sector is supported by policies that encourage credit-use and debt accumulation.

Where do you think "Net savings" falls in this graph of yours?

I think "net savings" is a specific, technical term, and I must have been out the day they taught it...

Your remarks on buying pre-owned Ford stock remind me of something Keynes said. This is out of context & may not make much sense: "But the Stock Exchange revalues many investments every day and the revaluations give a frequent opportunity to the individual (though not to the community as a whole) to revise his commitments." [emphasis added]
-- from chapter 12, section III of the General Theory.

Saving is always good, but excessive is never good.

Finally, I would agree that "much of what we are told is "saving" is actually consuming of a different type of product, a financial product." And I'd call it a result of emphasis on the supply side, and emphasis on finance.

The Arthurian said...

Putting money under a mattress would be "hoarding" I think.

And I'm making things up here, but "saving" to me implies making credit available for others to borrow, so, in the bank, not in the cookie-jar.

Not sure how MMT sees it; Winterspeak referred to savings as "dead money." I had a little trouble with that.

Greg said...

I actually used "net savings" myself. Ive not heard any MMT or any other economist use it but I do wonder if its a reasonable way to analyze things.

When so many have talked about the trillions that corporations are sitting on as if they should just use it t hire folks, I always remembered the enormous debt levels they were carrying too.If I have $30,000 in savings but I owe 85,000 on my house. Yes Im servicing my house debt out of income but can I really be said to be anything other than -$55,000? I am not saving I am owing. Yes we call this net worth but maybe we should call it something else.

"And I'm making things up here, but "saving" to me implies making credit available for others to borrow, so, in the bank, not in the cookie-jar"

I think making my money available for others to use is "investing" which is another form of spending. Some of that will end up as someones elses savings. This is something I gleaned from MMT, which is where Winterspeak got his term I think. If you are keeping your money in circulation you are spending not saving.

The Arthurian said...

Net savings... I pictured "additions" to savings versus "withdrawals" from savings. But that's not what you are looking at, I see.

Perhaps "Net credit position" describes it better? Your $30k in savings is (as I see it) $30k of credit you have made available. Your $85k mortgage balance is credit that you have in use. I like the terms "credit available" and "credit in use" for these things.

I think your "net savings" or "net credit position" could be a very useful way to look at things. You need some graphs. You need to fiddle with numbers and concepts until you find a graph that really shows what you are trying to look at.

Greg said...

When we look at collective net worth, is it possible that net worth is negative?

I think it is possible. I think as a whole we MAY owe more than we in fact have available to pay back, nominally. I think this might be one of the quirks of our credit system that we've developed.

Obviously in "real" terms this is impossible but we dont live in a "real" world.

I'm gonna have to rely on you for the graphs. U da Graf Man....... man! I just spout the nonsense that comes into my brain.... you're the analyst.... and a damn good one too!