Your grandfather started it

Sometimes I have a thought pop into my head: a one-liner that suddenly makes sense to me. It seems to be a direct quote. But it must be a distillation of something.

Take Keynes, for example. He doesn't often write one-liners. But then I wake up one morning with "Oh, Keynes said you can only either spend money or save it." And in my mind, the you can only either spend money or save it part is what Keynes said -- his words, not mine. And that's how I think of it.

And I've had a couple times when I went looking thru The General Theory for that particular phrase. So I could document it in my writing. Looking till my head hurts, but not finding.

Doesn't mean that the exact phrase is not in the book. But by the time my head hurts and I give up the search, I'm convinced that the exact phrase is not in the book. At that point, I have to think that those particular words are not what Keynes said, but just my memory of it. I don't know if that's correct, but it's what I have to think in order to proceed.

After that, I might say something like Keynes said you can only either spend money or save it. No quotes, so it looks like I'm paraphrasing him. But attributed to Keynes, so I'm not stealing the words, just in case. It's a compromise that lets me move on to the next sentence.

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What I did find in The General Theory was this:

Saving, in fact, is a mere residual. The decisions to consume and the decisions to invest between them determine incomes.

and this:

Clearness of mind on this matter is best reached, perhaps, by thinking in terms of decisions to consume (or to refrain from consuming) rather than of decisions to save.

That's gotta be where it came from.

It follows from what Keynes said, that if you want to save, you have to not spend. In other words, your only choices in this matter are to spend or not.

You can only either spend money or save it.

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I looked up think of "saving" as "not spending". It seemed to trip google up. I got Don't confuse 'saving' with 'not spending' at USA Today. The link is for documentation only. They've got a pop-up ad that makes me go all Tourette's.

Doesn't take much. Anyway, they say

Saving money and not spending money are not the same.

That obviously contradicts Keynes. How come? They continue:

Say, for instance, you decide to take your lunch to work for the next couple of days to save money. Yet, two weeks later, your savings account is no higher for your effort.

Oh. It's only "saving" if you put it in a savings account. That's what this guy is saying.

The same search turned up Avoiding Spending Is Not The Same As Saving Money by Trent Hamm at The Simple Dollar:

Eliminating a routine that involves spending money needlessly, or substituting a different routine that involves spending less money, is a great way to cut your spending...

But it’s just a single step. Alone, reducing spending cannot bring about positive financial change in your life...

You have to do something financially productive with that money.

Same thing. If I quit buying coffee on the way to work in the morning, it's a noticeable cutback in my spending. But if I spend the money on beer on the way home, I didn't "save" it. I get Trent Hamm's point. And the other guy.

How does this differ from what Keynes said?

Trent Hamm and the other guy are talking to the individual, the reader. They're trying to help people cope with a troubled economy. If you want to save -- if you want to increase your savings -- you have to put money into savings. That's their plan.

Okay. But Keynes is in big-picture mode. He's talking about how an economy becomes a troubled economy.

He's not just looking at our morning; he's looking at our whole day. If I don't buy coffee in the morning, that is a decision not to spend; if I buy beer on the way home, that is a decision to spend. All told, I spent the money. So I spent it on beer instead of coffee. I still spent it.

Talking about spend or not spend, Keynes means spend or not spend. If you spent your coffee money on beer, you still spent it. But if you take that coffee money and choose not to spend it, that's different. It's different, no matter where you put the money, as long as you don't spend it.

And if you look at all of us, not each of us, over fifty years or more, the amount of money the savers among us have chosen to "not spend" is a big number.

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Then I Googled keynes "not spending". Another Simple Dollar post came up:

The Paradox of Thrift
by Trent Hamm.

Subtitle: Is Saving Money Bad for the Economy?

Two years ago (in those economic halcyon days before the so-called “Great Recession”), I wrote a short article entitled Is Not Spending Money Bad for the Economy? In it, I largely concluded (by my own logic) that not spending money – in other words, saving it – isn’t necessarily bad for the economy at at all.

It's kinda cute. Now he's equating "not spending" with "saving". And these are the only two posts of his I ever read.

Anyway, Trent Hamm says

John Maynard Keynes ... believed that if everyone saved more money during times of recession, then demand for goods will fall.

And then Trent says

First, when demand falls, prices fall. When prices fall, people are more likely to spend money.

Yeah, in a normal economy, yeah. But when things go haywire, and so many people are saving more money that it causes demand and prices to fall, then maybe it's not a safe bet that the reduced prices will reinvigorate spending. Again, Keynes is thinking big-picture; Trent Hamm is not.

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Trent Hamm again:

The second factor – and this is the big one – that makes the “paradox of thrift” fail is that putting money in savings accounts does not remove it from the economy. When you put money in a savings account, it becomes money that the bank can then lend out to businesses. Thus, when more people save, the banks have more resources to pump out to businesses, and when the businesses have more resources, they employ more people, innovate new products, and find new ways to sell.

I crossed out the happy ending. Everybody's economic theory has a happy ending. It's all predictions and bullshit. Don't give me the happy ending. Just give me the argument and let me evaluate your thinking.

The last thing I didn't cross out -- "the banks have more resources to pump out to businesses" -- sounds to me like "loanable funds" theory. I thought like that when I started this blog but I've had it pretty well beat out of me by Greg and others.

I don't really know what "loanable funds" theory is. But the idea that if you put a dollar in the bank, I might borrow it seems to make sense. Maybe that's one way it works (though maybe not at "banks") and another way it works is "lending creates deposits". And clearly, if the bank can create a dollar by lending it to me, then me and the bank don't need your dollar before I can borrow.

I don't know quite how it all works. I'm told banks don't need loanable funds because they do creatable funds. Still, banks are always trying to get depositors. And banks are always trying to get deposits. They must need those deposits for something.

No matter. Let's ignore that part of the Trent Hamm excerpt, too. What we're left with, then, is something like this:

The second factor – and this is the big one – that makes the “paradox of thrift” fail is that putting money in savings accounts does not remove it from the economy. When you put money in a savings account, it facilitates bank lending.

Everybody okay with that?

I'm not done yet. Trent says

putting money in savings accounts does not remove it from the economy.

I disagree. It does remove that money from the economy. That money is removed from the spending stream. It is no longer part of what FRED calls "funds that are readily accessible for spending." (See the "Notes" tab just below their M1SL graph.)

The economy is transaction; money in savings is not in the spending stream; therefore money in savings is out of the economy.

Trent is right of course: Money does come into the economy when the bank lends it to somebody. But it comes in at interest. Thereafter, financial costs in the economy are higher than before.

Now, that may not seem like much. But if you've got 150 million people in the labor force, all of them at one time or another thinking about borrowing money -- and if you've got economic policies that encourage borrowing but do not encourage repayment of debt -- then if you just let the economy do its thing, the little extra financial cost that arises with that first innocent loan eventually becomes a financial burden too great for the economy to bear. And then you have a crisis.

You have to go big-picture here. Don't think about your one loan and the cost of one loan. Think about the loan your grandfather took when he was young. Think about how the cost of that loan added something to his cost of living. If he was in business, think about how the cost of that loan ate into his profits, and how he raised his prices to compensate. And then, think about how when his loan was paid off some years later, he already had two other loans bearing similar financial consequences. And by the time his loan was paid off, maybe 40 million people were deeper in debt than they were when he took out his loan. Big picture.

And then because all those people had increasing financial cost burdens, financial sector income was growing at a healthy clip. And people began to notice that it was better to put their money into financial investment than into productive investment. So finance grew, and grew faster than the real economy grew. Finance grew faster than output. And financial costs grew faster than output, too. Faster than income.

And this didn't stop, because as financial costs grew the standard of living took a hit, and so did productive business. And as the non-financial sector gradually failed, the financial sector became more and more appealing. And finance grew. And output suffered. And productivity suffered. And living standards suffered.

And then one day, the productive sector could no longer support the financial sector. That's when things got bad for finance. And that is called "crisis".