Wednesday, January 20, 2016
Those who do not learn from history...
You think interest is a good thing, don't ya? You want the nest egg.
Who wouldn't?
Really. I mean, who wouldn't? Everyone wants financial security.
Suppose we run with that. Suppose everybody saves every dollar of income they ever get. What happens then? What happens to GDP?
GDP goes to zero.
What happens to income?
Income goes to zero.
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Suppose instead, there is just a little inequality. One guy gets ahead of everybody else. And that one guy saves a little out of every paycheck. What happens?
Eventually, income goes to zero.
You don't believe that, do you. But if only one guy is saving, eventually that guy ends up with all the money. Or, with so much of the money that the economy can no longer function. And then income goes to zero. Or you know, we have a crisis. Call it zero.
Call it unacceptable.
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Everybody wants a nest egg. Everybody wants to save. Suppose that happens. What's the result?
There is an increase of savings, relative to everything else.
Suppose this continues for a long time, a hundred years say. What's the result? There is, after a hundred years, a very large amount of money set aside in savings. And not to say people are greedy, but right is right, and nobody wants somebody to come in and steal their savings. Nobody wants that. And nobody wants their savings eroded by inflation. That's not right, either. Yeah, those bristly bums that don't have savings, they might call for inflation. But they're just trying to steal my money. Can't have that. We have to prevent inflation. We have to limit the quantity of money to prevent inflation.
See? We put so much money in savings that it starts to cause problems in the economy, on the way to zero income but still yet a long way off, so much money in savings that the transaction economy begins to suffer because there is not enough money for transactions. And then we say: Oh, no! Don't you dare print more money! You'll erode my savings!!
See how it works?
But it's natural to want a nest egg. And it's natural to want to protect it, once you have it. So this problem will always arise.
Fall of civilization.
Those who do not learn from history...
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7 comments:
" so much money in savings that the transaction economy begins to suffer because there is not enough money for transactions. And then we say: Oh, no! Don't you dare print more money! You'll erode my savings!!"
When libertarians tell me that I reply "That would be its exact purpose"
What you didn't mention (yet) is if someone is going to save and collect interest then there must also be someone else who will borrow and spend the money and pay the interest. One could suppose that every dollar of debt is also a dollar of savings and interest rates reflect the aggregate willingness to save or borrow. That is, interest rates reflect the general willingness to overspend or underspend current income and the general desire to move current income into the future and/or move future income into the present.
It seems perfectly reasonable that if you have people who want to delay the use of their current income and others who want to have access to income before they've earned it, that there be a systematic way to make that happen that is equitable and transparent.
Do you think money saved disappears from the economy? George Bailey knew better.
Your non-saver is the ideal Keynesian man who works all his life, spends every penny, and dies broke the day he retires.
Yes of course money saved disappears from the economy. The economy is transaction.
Please tell George Bailey that there is no nexus which unites decisions to abstain from present consumption with decisions to provide for future consumption.
Remind him that these past few years have offered evidence of that.
Jim: "One could suppose that every dollar of debt is also a dollar of savings and interest rates reflect the aggregate willingness to save or borrow."
Your description is very precisely detailed with it comes to how the lending slash borrowing process works. But you are a little vague about what drives the aggregate willingness.
“Suppose instead, there is just a little inequality”
What is a little inequality? The share of GDP going to the bottom 90% of Americans declined as follows:
1. From 66% from 1942 to about 1975
2. to 65% in the mid-1980's
3. to 60% by 1992
4. to 57% by 2002
5. to 50% by 2008
6. To 49.7% by 2012.
To put this change into perspective, if the US had the same income distribution it had in 1975, each family in the bottom 80% of the income distribution would have $11,000 more per year in income on average, or $916 per month.
So something I am looking at your golden 1990’s and the data
From 1980 to 1992 5% reduction,
92 to 2002 3% reduction,
2002 to 2012 7% reduction.
I have to figure out how to run the correlations but from this I think there is going to be a strong connection between the growth of private debt and an increase in the share of GDP going to the top 10%.
Hi Art,
It is hard to be a put a finger on where aggregate willingness to do anything comes from since it is the sum of many things that are hard to measure. I believe the current low interest rates are an indication of a general unwillingness to borrow and a increased willingness to save, but I can't identify everything that is driving the current levels of willingness.
I think a big driver in the increased desire to save is insecurity about social security. The simple fact is this -> people live for 80 years but only work for about 40-50 years. If they spend every dime they make in income in the years they work then how do they survive for the other years? A few decades back people believed a social safety net had solved that problem. Today people are becoming more and more doubtful and therefore less willing to spend all their income.
One big driver in the willingness to borrow was the expectation that income from asset appreciation would make it easy to repay debt. Millions of homeowners withdrew equity from their homes in the form of second mortgages based on this expectation. Today the belief that asset appreciation is a sure thing source for future income is much doubted and therefore people are less willing to borrow.
Oilfield:
"From 1980 to 1992 5% reduction,
92 to 2002 3% reduction,
2002 to 2012 7% reduction."
Spectacular numbers! There's less reduction in the good years of the 1990s, after that jog-down in debt-per-dollar. Everything fits together.
And only 1% reduction in the long period before 1980-1992. Those were also good years, better even than the 1990s. And debt was lower then, too. And inequality was less.
Home run.
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