In macro, “Savings” is:
You may choose more than one answer, or none of the above.
Please explain your choice(s).
Extra credit: Is savings good, bad, or neither?
I pick 1, 2, and 5 as savings.
The reason the same for all of them. Each indicates that less is being spent than is taken in and either put aside as is or invested for (hopefully) additional gain.
The answer is three, four, and six. In macroeconomics income = expenditures. Spending by one person is income to someone else. Money not spent, therefore, is income not earned.
For any one person to save, someone else must dis-save (spend more than they earn). For one person (or nation, or sector) to have a surplus, there must be a deficit somewhere else. The sum of all transactions always net to zero.
“Savings”, at the macro level, can’t be “money not spent” because money not spent is always exactly offset by money not earned. It can’t be income minus expenditures, because income minus expenditures is always exactly zero.
In other words, no amount of “saving” (by not spending) ever results in any additional savings in the economy as a whole. If people begin saving more (by collectively spending less), the only result is a collective loss of income.
“2” is still a valid answer, and I really have doubts that “3” should be a valid answer. Although that’s a philosophical question about macreconomics.
Well, domestic product is the value of everything that’s produced, whether or not it’s sold. Since things are sometimes produced but not sold, they have to add in the value of those things in order to make the national income and product accounts match. Otherwise, the income from final products would be less than their value.
They call it “unintended investment”, and it’s also the way they make savings and investment match up (S=I).
Having said that, unsold inventory is, according to macroeconomics, “goods not consumed”, therefore you’re right: #2 is valid. That is, so long as you understand that stuff you don’t sell (or can’t sell) is considered “investment” in macroeconomics, and that investment is considered savings.
If economists said, “Hey, we have our own special definitions of words, which we use inconsistently, depending on the context,” it’d make things less confusing.
For example: Saving (not spending) reduces GDP. But saving (spending on investment) increases GDP. If you didn’t know that “saving” meant different things in each example, it would be confusing.
Yeah, that’s my issue here. “Savings” to me should mean “Funds not spent on consumption and therefore made available for investment.” Unsold inventory isn’t that - it’s funds already invested in goods not yet sold, obviously - although it** is **savings by another viewpoint.
Are you familiar with how the Federal Reserve’s opem market operations work? Very straightforwardly, they work by creating money out of nothing. They simply have a ledger (these days a metaphorical one, but at one time a physical one) and increase the amount of money on that ledger, while doing nothing else to decrease the amount of money elsewhere. Transactions between the Federal Reserve and the nation’s banks then turn this magically-created money in the Federal Reseve into ordinary money in the banking system, from which it flows outwards into the everyday financial world of you and me. So the sum of all transactions does not always sum to zero.
Savings is basically income minus one’s expenditures. Assuming by money you mean income, I’d say 1, 2, 5 and 6.
It depends. A negative savings rate means you spend more than you make, which isn’t a bad thing so long as you can get someone to finance you over the long run to make up the difference.
Probably 6.
I would like to point out that “consumption” is an ideological term. Money spent is not consumed on the macro level. It moves on to the next vendor of services. Calling expenditure “consumption” is misleading. Spending is not burning money; it is not killing it with tuberculosis. Expenditure is GDP.
Too much savings means too little expenditure, and is very very bad on the macro level. What we call the “paradox of thrift.” So while individuals are motivated to save for themselves, we have to discourage excessive saving.
That’s not quite the whole truth. When the Fed creates money, it does so by purchasing assets from the private sector. (Traditionally, the assets were always Treasury bonds. More recently, they’ve purchased mortgages.)
When it purchases those assets, it does exactly what you say it does - it simply writes the amount down in its ledger, which becomes a credit in the account of the seller. The seller exchanges something worth (for example) a million dollars for a million dollars cash. The seller’s net worth, therefore, doesn’t change.
The central bank’s net worth also remains unchanged, because the money it spent is a liability on the central bank.
When the Fed purchases Treasuries or other assets, it increases liquidity (cash) but does not increase anybody’s net worth. The Fed’s purchases have an effect on money (liquidity) but not wealth (net worth). Those transactions, therefore, sum to zero, because they don’t affect anyone’s net worth.
Having said all that, there is a way in which the collective net worth of the private sector does increase. It increases whenever the government spends more than it taxes. Savings in the sense “income minus expenditures” increases by the exact amount as the government’s deficit. (Of course, savings in the economy as a whole remain 0, because the increase in private savings exactly equals the dis-saving (debt) of the government.)
Debt - government debt - is the record of the increase in wealth in the private sector, as a result of the government spending more than it taxes.
Money is never consumed by spending it. And money (at the macro level) is never increased by saving it. You’re right: people often get confused by this. Sometimes it seems they think “money wasted” means money itself is destroyed. Or that if we (collectively) save money we’ll have more of it.
Technically, GDP is the value of goods and services produced, regardless of whether they’re sold. So, for example, unsold inventory is part of GDP. Practically, it makes little difference, since things that don’t sell stop getting produced.
The consumption/investment division doesn’t make much sense to me. it gets pretty arbitrary pretty quick.
I would argue it’s not so much we need to discourage saving, as it is we need to accomodate it it. At the macro level, saving (not spending) is just a reduction in the velocity of money. When velocity slows, GDP will fall, so long as the amount of money stays the same. In order to maintain GDP, somebody needs to provide whatever level of savings the private sector needs, in order to maintain spending.
Well, a central bank can accommodate saving for a while with inflation, and then dial inflation back if the nation’s money starts being saved less overall (though I don’t know when that ever happens). As far as middle-class savings, that seems like the thing to do.
But I think on a government level, that is, a tax policy level, we should aggressively tax large investment holdings. I’m not sure we shouldn’t tax long-term capital gains at a higher rate than other income (past a personal exemption).
But I don’t have the formal education, and I’m mostly trying to find a way to avoid the sort of constantly growing concentration of wealth we see in Third World economies (like the USA, b’dum tish).
And I’m digressing from the general issue there.
Ask for your family’s money back to pay for your college education.
Inflation is a function of the supply of money, and the demand for money, relative to goods and services. Money can be demanded either for the purpose of spending it, or for the purpose of saving it (not spending it). When money is saved, rather than spent, it does not create inflation. Net spending won’t increase until the aggregate demand for savings (net increase in wealth) has been satisfied.
Increased spending does not create inflation so long as there’s sufficient unused capacity to increase production to meet the increased demand. Capacity equals the supply of un- and under- employed workers, plus whatever facilities they need to do their work. Generally speaking, whenever there’s a supply of unemployed, but willing and able workers, that means the economy has the capacity to grow - without creating inflation.
Convention wisdom is that the economy has to grow for unemployed people to find work: actually the reverse is true. Unemployed people need to go to work in order to grow the economy.
All that’s required for this to happen is to increase the net value of household balance sheets to the point where people feel comfortable spending again.
The central bank can’t accomplish this by itself. (Well, it could - but it won’t, and it shouldn’t.) Central banks don’t spend money on nothing. Rather, they spend money on private sector assets. Because the value of the assets they purchase from the private sector is equal to the money they pay for them, private sector balance sheets remain unchanged regardless of central bank operations. Central bank operations affect liquidity, not wealth. In order for the central bank to increase wealth, it would have to spend money on nothing - a bad idea.
If you’re just another Internet douche, I expect this’ll be the last thing you have to say.
At least to a crude first approximation, when you save money in the bank, the bank will lend it to a businessman who needs funds to invest in, e.g., capital equipment. Thus savings and investment become the two sides of the same coin. (And therefore certain distinctions here become just confused conflations.)
It may be off-topic here, but the way the Fed “creates money” is little different, in principle, from the way private commercial banks create money. I am astounded by the gold-bug idiots who somehow find the Fed’s government power “pernicious” and think unregulated private banks’ creation of money would be safer or “less pernicious.” :dubious: 
:smack:
The “money multiplier” and “loanable funds” models are wrong. What’s wrong with them is not just that they don’t describe how banks actually work: they get the nature of money wrong as well. They’re dependent on an understanding of money as an asset, and asset only - like gold. Modern money works differently. It is always an asset to one party, and a liability to someone else. Commercial bank deposits are liabilities on a commercial bank - and assets to the public. Central bank deposits are liabilities on a central bank - and assets to commercial banks.
In no case is there a preexisting pool of money, and in no case is there any physical limit to the amount of money that may be lent. The process - or act - of lending actually creates the money that is lent. Lending precedes deposits, because without lending, there is no money to deposit.
Banks can create indefinite amounts of money so long as there are willing customers and opportunities to make profits. Fractional reserve banking is a complicated fiction, and there is no such thing as “loanable funds” - funds don’t exist until they’re lent.
The sum of money - the assets of some minus the liabilities of others - is 0.
Which school of thought is that?
It’s part of modern monetary theory, but it’s not exclusive to MMT.
Septimus’s Wikipedia link:
To my understanding it’s how money creation is understood at the Fed and other Central banks.