That’s another good possibility. My father-in-law, who is 93, has bought stock in every nano company he can find. He doesn’t expect to make any money, but he’s going to give it to my kids, who maybe will making a killing on one of these (or two if they’re really lucky.)
The big jump in the savings rate recently is a hopeful sign, if we can keep it up after the recovery. It’s not a matter of income - even people making a lot of money can get into debt if not prudent. I hope this will be kind of like the experience of the Depression which made my parents big savers.
Savings does not strengthen our economy. In fact, a jump in the savings rate will be the biggest reason the recovery will be delayed, unless it is matched by profligancy elsewhere (corporate spending, government spending, etc).
Saving money is like trying to get something from nothing. You go to work, where people pay you to produce things. Those people would like to have jobs too, and be paid to make their own stuff. But if you take the money they give you and put it under your mattress, instead of giving it back to them, you screw them over. Every dollar you save must be matched by a dollar borrowed by someone else. You can’t have an economy where everyone saves without grinding the economy to a halt.
Yup, you nailed it. The rich people saved, and it was balanced off by poor people spending. But how can you let the poor people save, while preserving the economy? You’d have to force the rich people to spend, or else take away their money.
Too much saving doesn’t. ***Some ***saving does, so people don’t suffer financial disaster with every economic downturn.
:dubious: Um, no. It’s called “being prudent”.
That’s ridiculous. Saving money is not “screwing people over”, and yes you can have a perfectly functional economy where everyone saves money. In fact, unless you intend to have the government hand everyone large sums of money for everything bigger than a month’s salary you NEED savings. Since when did living hand to mouth become necessary for the economy ?
It’s called “taxes”.
Going back to the op.
The author bases his claim on the Case Schiller Residential Real Estate Index and bemoans the fact that this index generally runs flipping between 110 and 120 since the 1950s until it had gotten up to 200 with this recent bubble. And now it’s under 100, probably something like 80. Yeah? And?
Did he explain what that index means? I thought not. 110 means that the average home increased in value by 10% on resale not counting for any value added by remodelling or other improvements to the property.
So yes, it is highly unlikely that we will see houses flipping for twice their value any time again soon. And there is no reason to desire that to occur. I fail to find why that fact should be depressing or alarming. An index much higher than 120 for a long time is what would be alarming to me. And I say that as a home owner whose house has no doubt lost some value and who is now not able to borrow against it to say help pay for my next kid’s college or for my next car. What his historic curve tell me is that 110 to 120 is normal and that we can expect to get back there fairly soon. Any higher than that and how would my kids ever be able to buy homes?
Savings is required in order for lenders to have cash to lend so that businesses have money to spend on building new sorts of products in better ways and to pay new workers on time. “Too much” savings means that products are not being bought. How to balance those forces is Black Magic to me.
No, you can’t. All saving must be matched by borrowing lest you alter the money supply.
(You can save at one point in your life then spend it at another, and this balances off if everyone does it at different times and doesn’t suddenly switch their habbits, but you can’t just keep saving and saving. It’s very similar to borrowing, in fact, except that while it’s impossible to borrow more money than is available, it’s possible to save all the money in circulation. And then to suddenly release it back. A savings-based economy is quite prone to being cyclical, and the present troubles are also because of saving – or rather, an aversion to lending. If the banks weren’t saving their money and causing deflation and preventing the Fed’s efforts to expand the money supply and scaring the Fed with the prospect that the saved money will suddenly be released to cause inflation, we wouldn’t be in this mess.)
Indeed. Taxes are perhaps the best tool to manage the economy, but noone ever uses them as such (well). I wish the Fed could add taxes to its puny set of policy tools (eg, a tax on saving and a tax on spending, and perhaps even special taxes that target particular demographics). These could be used to regulate the economy well, and orchestrate the flow of money.
But instead, the opportunity is squandered.
The banks and financial sector destroyed the economy. They are not satisfied with the bailout money. They are paying less for savings and adding fees for everything they can think of. They are jacking interest rates up . They are going to do what they always do, loot the consumer .
They were given bailout money to thaw lending. They lined their pockets and made lending more difficult. When this mess started we should have taken over some banks and spearheaded the loosening of the economy. When we let the thieves at the top have input, they just kept stealing. It has delayed the recovery or perhaps derailed it completely. How anyone who worked for Goldman/Sachs or any other institution should have input, I can not imagine. They have looted the system and will do it again and again.
Um, yeah. That’s what a good business is supposed to do. Minimize costs (including salaries) while maximizing revenue to turn a profit. If every company paid their employees significantly above market wage, either they would all go out of business or inflation would drive up prices.
All in all, the markets do a pretty good job of setting wages and prices.
No, spending money you don’t have is trying to get something from nothing. That dollar represents one dollar’s worth of my labor I put into the system. If everyone saves that means people are putting in more labor into the system than they are taking out.
And I don’t want to get into a whole discussion of the fractional reserve banking system, but each dollar saved does not have to be matched by a dollar borrowed.
But this doesn’t address the contradiction I mentioned. In our current market, there is downward pressure on wages thanks to the weakening of unions and offshoring. So the market is global. However, the market for American products is much more local, thanks to trade restrictions in places like China. So, the labor market is bigger than the product market. Driving down wages in a local market would drive down ability to pay, and thus drive down prices, and we’d be in equilibrium again, but if the collective business could drive down wages while maintaining pricing, they would increase profits - which is what happened in the past 8 years, as median incomes did not keep pace with prices. This got accomplished by wiping out the savings rate. But that is over. As consumers finally woke up, the savings rate is increased and sales have decreased.
So, a few things might happen. We might see permanently depressed sales, and prices dropping to become affordable again - decreased profits. We might see wages rising to the levels they were in the pre-Bush period. Decreased profits in the short run. Businesses would like to increase sales using exports, but this is going to be tough while China strongly encourages a high savings rate (and unofficially encourages pirated products.)
I think we’ve seen enough evidence lately that the simplistic “market is god” philosophy doesn’t work. There was a column in the Times the other day about how the efficient market hypothesis is dead - killed both by the behavioral economists and the clear irrationality of the market during the bubble.
I’m not prescribing anything, btw. I’m just describing the cause of the crash.
ETM: the above should really say a cause of the crash.
True. Short term it is a problem, but long term it is good. Savings is not going under a mattress, but should be put to productive use. Savings can prevent the inefficient use of money through high interest rate credit cards. Savings can also encourage big purchases at some point. I’d expect someone with a good bit in the bank will be more likely to spend than someone with credit cards maxed out. A population with savings is also less likely to default on the loans they have, which is also more efficient.
The financial institutions will suffer in the sense that their profits will be decreased, but that is more the historical norms than the massive part of the economy they’ve become.
Make the poor people not so poor. If you want a third world country to be a market, you can’t swindle them or force slave wages on them so they have no money to buy your stuff.
We’ve had lots of Dopers rail at the minimum wage. They’ve never explained who is going to be able to afford to buy the stuff they produce if people have barely enough for rent and food.
We can’t make rich people buy more - but we can tax them more so more money goes to those who will buy more
If people save too much, there will be a lot of money out there to lend, which will make interest rates fall, which should decrease the savings rate a bit. I don’t know what the optimal savings rate is, but I’m pretty sure it is not negative.
Anyhow, in our global economy the borrowing might be done outside the country, as is the case with China.
That is my point in that it is a Prisoner Dilemma problem. Business can’t collectively decide to drive wages up or down because decision making isn’t (and shouldn’t) be centralized. It is the aggregate of all those individual decisions that while good for each business individually may or may not be good for the economy as a whole.
Of course they can. They can choose to cooperate to manipulate wages and prices. Oh, you can outlaw open price & wage fixing, but you can’t outlaw things like unspoken understandings, or them all making the same decision simply because it’s obviously the most profitable.
I’m not sure it can. I don’t think you can “borrow” across the barrier that is the foreign currency exchange. I think people say this as an approximation, but it is not quite true.
For example, let’s analyze “China is lending us money.” Chinese government exchanges the massive reserves of RMB it accumulates from fiscal surpluses and communist industry profits for USD. It then takes the USD and uses it to buy Treasuries. (The net effect is that we are left with RMB that we have to spend on Chinese goods while China is holding valuable Treasuries.) The dollars flow from (hypothetically-) American investors to American investors. There is no net money being lent to us (to fuel asset bubbles, etc.) that I can see. The RMB that we hold can’t raise American house prices (except in an indirect, psychological, “we’re rich biatch” sort of way).
I live in a 360 sq ft studio apartment in which I am not building any equity. I drive a 13-year-old economy car. I buy most of my clothes at Good Will and other thrift stores. I buy store brands and shop at dollar stores. Almost all of my electronics are second hand, purchased at thrift stores and on eBay. I manage to put some savings aside every month, but not a great deal. To finance this life of fabulous luxury, I do general office grunt work. I’m not complaining, mind you. I’m doing better today than I was only a few years ago. Nevertheless, this doesn’t strike me as living far beyond my means on somebody else’s dime, nor does it seem like an “irrational expectation” not to want my standard of living to sink back into outright poverty where it was for so many years.
:rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes: :rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes::rolleyes:
Please tell me how much lower you think my standard of living should be.
In the mean time, they will wreck national economies, and drive many workers into third world levels of poverty. When the rich ship American jobs overseas, most of the money they save doesn’t show in lower prices. Most of the difference between American wages and Chinese or Mexican wages goes into their pockets.
Do you really think the wealthy always deserve their wealth, and do you really think that allowing greater and greater wealth to accumulate into fewer and fewer hands is a good idea? Do you really believe distribution of wealth is entirely about economics and never about politics?
Do you believe globalization is being done for the good of people like you and me? Or is it being done in the interests of the wealthy and powerful?
It’s not a Prisoner’s Dilemma problem, more a tragedy of the commons problem. Of course no one is saying that business is collectively deciding anything - that might violate antitrust laws, and would be anti-competitive. Once the first business moved stuff to India, the others did also. Not doing so takes a lot of guts - look how CostCo gets heat from the Street for paying better benefits than WalMart.
The same thing happened to cause the crash. When one bank made profits on risky bets, most others felt they had to also, or be less competitive. That’s exactly why regulation is required - someone needs to look at the big picture a few years out.
ETA: Oops, forget the “no one” - DerTrihs just did. I haven’t seen any evidence for collusion, and I don’t see why any is required to explain the current situation.
I didn’t say that it was; I was just responding to the claim that businesses can’t do things like drive down wages due to the lack of a central authority; they don’t need one.