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Community => General Talk => Topic started by: Vellos on September 13, 2011, 09:32:25 PM
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Don't feel bad, it's the same mistake economic theorists make all the time, which is one of the reasons most 1st world economic politics are !@#$ed up, but that's a different topic.
Watch yourself; one of them might be listening.
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Watch yourself; one of them might be listening.
My college ECON professor was very fond of the Monty Python quote, "It's only a model". The problem is thinking that the model reflects reality.
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My college ECON professor was very fond of the Monty Python quote, "It's only a model". The problem is thinking that the model reflects reality.
if you ask me, modern day economists are all a bunch of shizofrenic, psychotic delusional narcissists who live in there little computer model bubble of the economic world and forget that indeed, it's only a model and not reality.
It's nice to have some model to predict things, but it gets !@#$ed up when you perceive it more as reality then... reality, just because it is more understandable and logic than reality, which is rather chaotic and unpredictable.
Ow what do i hate those people...
But reality for us is that we depend on them right now, so we better play nice for now. :P
(please save my little euro's ! ::))
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if you ask me, modern day economists are all a bunch of shizofrenic, psychotic delusional narcissists who live in there little computer model bubble of the economic world and forget that indeed, it's only a model and not reality.
It's nice to have some model to predict things, but it gets !@#$ed up when you perceive it more as reality then... reality, just because it is more understandable and logic than reality, which is rather chaotic and unpredictable.
Ow what do i hate those people...
But reality for us is that we depend on them right now, so we better play nice for now. :P
(please save my little euro's ! ::))
I think the main problem is the difference between MACRO economics and MICRO economics. For example, to help the macro economy, I should spend my money and rack up huge amounts of credit card debt. To help the micro economy of my family, I should instead pay off my debts.
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if you ask me, modern day economists are all a bunch of shizofrenic, psychotic delusional narcissists who live in there little computer model bubble of the economic world and forget that indeed, it's only a model and not reality.
It's nice to have some model to predict things, but it gets !@#$ed up when you perceive it more as reality then... reality, just because it is more understandable and logic than reality, which is rather chaotic and unpredictable.
Ow what do i hate those people...
LOL.
Sound like Vellos...? ;D
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I think the main problem is the difference between MACRO economics and MICRO economics. For example, to help the macro economy, I should spend my money and rack up huge amounts of credit card debt. To help the micro economy of my family, I should instead pay off my debts.
Therein lies the paradox. Individual savings is a virtue, but if the everyone saves (instead of spending on goods), your economy will slow down, reducing wages and driving down the amount of money you can save.
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Therein lies the paradox. Individual savings is a virtue, but if the everyone saves, your economy will slow down, reducing wages and driving down the amount of money you can save.
Yet savings are a requirement for investing, which is necessary to promote economical growth.
I don't buy that it's such a paradox. Saving will slow down the consumer's market, but the investments will profit other kinds of industries, especially exports, which will then rack in profits for their investors. In the end, if we save more, we'll just see a shift in our main economic industries. Since the global economy is more and more open, we will just end up compensating for our smaller internal demand by seeking foreign markets as outlets for our products and services.
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Yet savings are a requirement for investing, which is necessary to promote economical growth.
Whether or not a person has savings, he will always have to invest some part of the money he earns for his subsistence, so there can be this investment even without savings.
By investment, I refer to every transaction a person undertakes- By buying groceries, you are investing your money into the grocers, allowing him to continue his trade and make a profit on the side, in turn allowing the grocer to make further transaction, and so on.
If all of us decide that instead of buying that huge LCD display, to save our money, we would drive the LCD vendor out of business, whos bankruptcy would create ripple effects that would affect the entire economy.
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Therein lies the paradox. Individual savings is a virtue, but if the everyone saves (instead of spending on goods), your economy will slow down, reducing wages and driving down the amount of money you can save.
Thats why high savings countries like China have such low growth rates, and high-consumption economies like the US have such high growth rates.... err... what?
The idea that either consumption or investment is a necessary or logical lever for growth is silly. Infinite investment in an idea that is basically worthless will not make it functional. Infinite consumption in an economy that is basically unproductive will not make it prosperous.
In a high-savings economy, declining wages could be compensated for in the medium term by rising return on investment in companies that enjoy lower wages. Long term returns on k and l operate differently, and short term lower wages will definitely be the predominant effect.
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can we split this off into a topic somewhere in general chat? it's left the actual topic, and I accept it as my fault. :-)
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Thats why high savings countries like China have such low growth rates, and high-consumption economies like the US have such high growth rates.... err... what?
The idea that either consumption or investment is a necessary or logical lever for growth is silly. Infinite investment in an idea that is basically worthless will not make it functional. Infinite consumption in an economy that is basically unproductive will not make it prosperous.
In a high-savings economy, declining wages could be compensated for in the medium term by rising return on investment in companies that enjoy lower wages. Long term returns on k and l operate differently, and short term lower wages will definitely be the predominant effect.
In a country like the U.S, consumption is debt driven- people don't have enough money and are spending over and beyond what they have. Of course, this is unsustainable.
China keeps it's inflation artificially low. So the GDP appears larger than it really is. China has recessions even when it's GDP is chugging along at around 5 or 6%, so that gives you an idea of what it's actual GDP should be. In India, inflation is in the double digits. The average person in the developing country thus spends a much larger portion of his income on food or fuel. The average person also has to worry about his future (no social security, pension or universal healthcare), and is obliged to maintain a level of savings.
When a company wants to make an investment, where does it get this money from? For a vast majority of companies, it is not from savings, but from the expenditures of consumers, the government and or other firms.
Only a fraction of savings goes to companies for their investment purposes. The rest ultimately ends up going to consumption, as banks are quite happy to lend money to people who will use the money to consume goods. Thus by consuming the good, you are providing the company with the funds they need to invest.
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Whether or not a person has savings, he will always have to invest some part of the money he earns for his subsistence, so there can be this investment even without savings.
By investment, I refer to every transaction a person undertakes- By buying groceries, you are investing your money into the grocers, allowing him to continue his trade and make a profit on the side, in turn allowing the grocer to make further transaction, and so on.
I think you completely misunderstand what an investment is. Buying groceries can be considered an investment if you will, under certain conditions... but in yourself, not in the grocerer. For example, I could decide to buy more fruits in order to be more healthy. This is investing in one's health.
Consumption is *not* investment, they are opposites. Check wikipedia (http://en.wikipedia.org/wiki/Investment) or your dictionary or any financial definition if you want. You can invest in the grocery, but buying food is not that, buying food is comsumption.
If all of us decide that instead of buying that huge LCD display, to save our money, we would drive the LCD vendor out of business, whos bankruptcy would create ripple effects that would affect the entire economy.
Uh... Who the hell sells nothing but LCD displays? You speak as if the bank is a void... The more money you put in the bank, the more money the bank will be able to lend out, the lower their interest rates will be, which will help both businesses and consumers, and therefore consumption will be increased.
When a company wants to make an investment, where does it get this money from? For a vast majority of companies, it is not from savings, but from the expenditures of consumers, the government and or other firms.
How do companies invest? Typically, by credit (because if you were saving up yourself and your project is truly profitable, then surely you would have made more money by starting it earlier and paying the interest on the loan than by waiting out and sitting on your cash). Where do they get their credit? Directly or indirectly, from the banks (even with government aid, because the government doesn't do surpluses either because it follows the same logic, it runs on credit). What determines how much money and at which rate can the banks offer loans for said investments? Quite simply: savings.
Only a fraction of savings goes to companies for their investment purposes. The rest ultimately ends up going to consumption, as banks are quite happy to lend money to people who will use the money to consume goods. Thus by consuming the good, you are providing the company with the funds they need to invest.
That's some !@#$ed up logic. You are saying that consumers buy products with the objective in mind that this will allow companies to invest. What the hell kind of goal is investing for the sake of investing? And why would the consumers care if the companies invest or not?
Companies invest so that they may better sell their products to consumers. Companies invest with loaned money, because their profit rate will be higher than their interest rates (unless they fail at business). Banks will be happy to lend them the money because the interest rates will be higher than the inflation rates. Therefore, everyone is happy: banks get more money off of their money, company gets more sales and therefore profits, and consumer gets a greater product availability, and likely at a cheaper price too.
Therefore, by saving, we are helping the economy just the same as we are by consuming, as we help promote investment. The problem with saving is that governments only have issues with it when the economy slows down and consumption drops, as the consumption-based market fails. The problems that arise from this are not because consumption-based markets are better in every way, but rather because the transition between a consumption-based market and a savings-based market requires radical mutations, and a lot of people are going to hurt during the transition phase. It's the same with any major economical mutation, just think of how bad the ex-USSR had it when transitioning to a market-based economy. Some countries are still not over with the problems.
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Therefore, by saving, we are helping the economy just the same as we are by consuming, as we help promote investment. The problem with saving is that governments only have issues with it when the economy slows down and consumption drops, as the consumption-based market fails. The problems that arise from this are not because consumption-based markets are better in every way, but rather because the transition between a consumption-based market and a savings-based market requires radical mutations, and a lot of people are going to hurt during the transition phase. It's the same with any major economical mutation, just think of how bad the ex-USSR had it when transitioning to a market-based economy. Some countries are still not over with the problems.
Saving does nothing to increase GDP. It decreases the cost of capital, nothing more.
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Saving does nothing to increase GDP. It decreases the cost of capital, nothing more.
Saves the cost of capital, which allows to improve means of production, allowing businesses to lower costs and therefore increase sales and profits! ;D
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Saves the cost of capital, which allows to improve means of production, allowing businesses to lower costs and therefore increase sales and profits! ;D
Though really, what I meant was: "Who cares for the GDP"? Pay a thousand people to dig holes for 10 hours a day, and then to fill them back up on the next, and you'll see a good increase in GDP. Is society better off for it?
GDP's an indicator. No indicators are perfect.
If GDP remained the same for people and businesses (who are naturally adapted or have adapted to a higher savings market) being more financially secure, then that's a good thing.
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Though really, what I meant was: "Who cares for the GDP"? Pay a thousand people to dig holes for 10 hours a day, and then to fill them back up on the next, and you'll see a good increase in GDP. Is society better off for it?
GDP's an indicator. No indicators are perfect.
If GDP remained the same for people and businesses (who are naturally adapted or have adapted to a higher savings market) being more financially secure, then that's a good thing.
the thousand people in your example were presumably paid for their work, and able to feed their families. in turn, the grocery stores take that money and pay the farmers, who can then afford to buy seed and fertilizer, etc. Yes, I say that society is better off because people are employed and children aren't starving.
Don't get me wrong--we need to get weaned off our debt drug, and start saving more. but walmart, target, sears, they all need customers to SPEND money, or they go out of business. And the companies that produce those products--Volcom, Procter & Gamble, Carters--also need people to spend money, or they go out of business.
Savings make investing in increased production possible. But if you don't have sufficient demand for your existing capacity then you don't need to borrow more.
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the thousand people in your example were presumably paid for their work, and able to feed their families. in turn, the grocery stores take that money and pay the farmers, who can then afford to buy seed and fertilizer, etc. Yes, I say that society is better off because people are employed and children aren't starving.
Don't get me wrong--we need to get weaned off our debt drug, and start saving more. but walmart, target, sears, they all need customers to SPEND money, or they go out of business. And the companies that produce those products--Volcom, Procter & Gamble, Carters--also need people to spend money, or they go out of business.
Savings make investing in increased production possible. But if you don't have sufficient demand for your existing capacity then you don't need to borrow more.
Or, you know, these people could get real jobs to contribute to society, and the government can offer welfare to help them out in the meanwhile at lesser cost.
Because you have to realize that these hole diggers don't get magically paid. To pay them to dig holes, the government needs to tax you, preventing you from using that cash on other consumer goods.
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The more money you put in the bank, the more money the bank will be able to lend out, the lower their interest rates will be, which will help both businesses and consumers, and therefore consumption will be increased.
...Yeah... Which is why we had the Great Depression. Money had been packed away as savings in banks. Less aggregate expenditure into the economy lead to income decline and massive unemployment. To make matters worse, firms rolled out massive amount of output for which there just wasn't the demand. As the times became tougher, people started hoarding even more, worsening the cycle.
You didn't read what i posted last. A majority of Firms are not dependent on borrowed money- they get their funds from retained earnings, earning which they made because some consumers bought their goods. Money spent by one is the income of another- Its a circular cycle, and if you cut out one step in the process, you are undoubtedly going to impact the entire cycle.
You are saying that consumers buy products with the objective in mind that this will allow companies to invest.
Rubbish. I was merely stating what i stated in my earlier point- by consuming goods, the consumer is increasing the earnings of the firm, which will allow the firm to invest.
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...Yeah... Which is why we had the Great Depression. Money had been packed away as savings in banks. Less aggregate expenditure into the economy lead to income decline and massive unemployment. To make matters worse, firms rolled out massive amount of output for which there just wasn't the demand. As the times became tougher, people started hoarding even more, worsening the cycle.
That is certainly 1 theory, as with most things it isn't really possible to definitely state the cause of the recession partly because peoples ideology colour their interpretations, partly because there are arguments about when it even started, but mostly cause it is a complex system with multiple linked dependences. One could say the Depression was cause by the trend in America to save more, one could also say the trend to save more was a symptom of greater structural issues that resulted in decreased consumer confidence.
You didn't read what i posted last. A majority of Firms are not dependent on borrowed money- they get their funds from retained earnings, earning which they made because some consumers bought their goods. Money spent by one is the income of another- Its a circular cycle, and if you cut out one step in the process, you are undoubtedly going to impact the entire cycle.
Rubbish. I was merely stating what i stated in my earlier point- by consuming goods, the consumer is increasing the earnings of the firm, which will allow the firm to invest.
Most firms are not dependent on borrowed money for ALL their investment, but I seriously doubt that large scale (where large is relative to the size of the firm) investments are routinely made from retained earnings, simply because it makes little financial sense for a business to accumulate large amounts of retained earning when they could be using that money to make more money already.
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...Yeah... Which is why we had the Great Depression. Money had been packed away as savings in banks. Less aggregate expenditure into the economy lead to income decline and massive unemployment. To make matters worse, firms rolled out massive amount of output for which there just wasn't the demand. As the times became tougher, people started hoarding even more, worsening the cycle.
Indeed, that's what I call mutation pains. The economy was not adapted to savings, but to overconsumption. It was a consumption-based economy. Any shift out of that model is going to be painful. But that doesn't mean that the misery will be eternal and that in the end the other model won't work. I just have to think about the Québec economy, which was historically very lumber-based. When the USA decided to start double-crossing us on the lumber free trade agreement and the house market collapsed, a lot of towns started hurting a lot, as they were dependent on their lumber factory for their economy. The market mutated, and now people are hurting for it. There are two possible solutions for it: have the non-lumber towns and cities back them up until things are better, or adapt to a non-lumber economy. Since the government makes revenues on lumber rights, it decided to bail out the lumber industries, prolonging the misery, in hopes that they will eventually see brighter days. The problem, however, is structural. Our workers demand way too high a wage, and we just aren't nationally competitive with other exporting lumber markets such as China or Russia. The government could have just as easily used these millions of dollars to promote the growth of new industries instead. Or, it could have let the free market do its thing and have these villages closed, as nothing economically justifies populating these remote towns in the middle of the woods anymore. In any case, it had many options, sticking to save the status quo was not the only one.
As such, it's obvious that switching out of a over-consumption economy will hurt. But not all industries will be hurt, and the hurt isn't going to be eternal as the economical agents adapt to the new economical realities.
Most firms are not dependent on borrowed money for ALL their investment, but I seriously doubt that large scale (where large is relative to the size of the firm) investments are routinely made from retained earnings, simply because it makes little financial sense for a business to accumulate large amounts of retained earning when they could be using that money to make more money already.
Indeed. Stockpiled money is wasted money. You need money to make money, but if that money is just sitting there, you'll lose it due to inflation as it will be worth less when you spend it than when you earned it. It is therefore optimal to spend it as soon as you get it, and to operate on loans, because the profits you will make on those additional products/services will be greater than the payments done to the bank (unless both you and your bank fail at business, 'cause in the alternate case you should not have sought a loan and the bank should not have granted it).
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Saving does nothing to increase GDP. It decreases the cost of capital, nothing more.
Expenditure approach to GDP:
Y = C + I + G + (X − M)
Y = Nominal GDP
C = Consumption
I = Investment
G = Government Spending
X = Exports
M = Imports
G can be perhaps more properly divided among C, I, and NX (NX being Net Exports, or X-M), as most, if not all, of G is either on consumption or investment.
Definition of investment by wikipedia (which is pretty undisputed):
I (investment) includes business investment in equipments for example and does not include exchanges of existing assets. Examples include construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. Spending by households (not government) on new houses is also included in Investment. In contrast to its colloquial meaning, 'Investment' in GDP does not mean purchases of financial products. Buying financial products is classed as 'saving', as opposed to investment. This avoids double-counting: if one buys shares in a company, and the company uses the money received to buy plant, equipment, etc., the amount will be counted toward GDP when the company spends the money on those things; to also count it when one gives it to the company would be to count two times an amount that only corresponds to one group of products. Buying bonds or stocks is a swapping of deeds, a transfer of claims on future production, not directly an expenditure on products.
Emphasis mine.
You are correct that savings does not directly increase GDP like consumption does. However, the question is, from what source does investment arise. The answer is a mixture of G, corporate profits, financing, and credit. Credit and financing are the largest. Read almost any company's financial statements and you will find that credit and financing are the largest source of their investment moneys. Not direct government purchasing or annual profits. Credit. Financing.
What defines the availability of credit? Crudely, the interest rate. A lower interest rate indicates, ceteris paribus, more access to credit. What defines the availability of financing? The existence of inactive moneys; that is, the existence of savings (either corporate, household, or government). What generates a low interest rate? Tons of things affect interest rates. ONE of those things is the supply of loanable funds. What defines the supply of loanable funds? The existence of comparatively inactive moneys, and also monetary expansion.
In sum, "saving" (which is effectively synonymous with "inactive moneys" in this case) can affect GDP through:
1. Lowering interest rates, thereby, ceteris paribus, encouraging investment through credit
2. Increasing the availability of private financing, ceteris paribus, encouraging investment through financing
Investment tends to be more generative of long-term growth than consumption, in most macroeconomic theory of any part of the political spectrum.
It is true that a short-run exogenous positive consumption shock will boost the economy. For many years, the dwindling of American savings and the increased availability of credit was treated by macroeconomists as just such a shock. This was dumb. Dwindling savings and ballooning credit is not an exogenous shock, but symptom of systemically increasing risk tolerance (or decreasing risk aversion, much the same). Risk tolerance in the last few years, post-2007, has declined. Savings rates have risen. Growth has slowed. Corporate cash reserves and bank capital reserves have risen. What is necessary for an effective recovery to begin is not properly for consumption to pick up (that would help, but that's not really where the slack is: decreasing savings rates now won't pull money already stockpiled in institutions into circulation), but for institutions to find profitable investment ventures. Such ventures, in many developed countries, seem few and far between, and there is significant debate over how to find/cultivate them.
Cue politics.
In sum, yes, savings can (and does) have a non-negative role in GDP. Savings is not a "withdrawal" from a GDP account. It is a (if not the only) major driving force for one of the essential components of GDP, and a component that is uniquely essential to long-term growth.
I don't think I even needed to make any politically controversial statements to get there.
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Anyone who believes you can have infinite exponential growth on a finite planet is either a madman or an economist.
:D, my two cents
But lets go back to the discussion that this topic was about, new estates and effects on looting and TO. Somehow I do not suspect we can loot the US anytime soon, or TO any other regions on this world, so lets stick to BM in this topic :D
can we split this off into a topic somewhere in general chat? it's left the actual topic, and I accept it as my fault. :-)
Maybe you need to ad some big red flags to your post, as people walked right over it :P Or a siren or two for added effect.
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And you're missing my point entirely.
Is investment important? Yes.
Is it a good idea to put money into savings? Yes.
The question is, how do we get companies to invest? Companies are not investing because consumers aren't spending. Corporations are hoarding cash, rather than expanding their workforces or performing capital investments. The way to get them to spend money is to convince them that the economy is improving. The way to do that is to get consumers to spend.
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And you're missing my point entirely.
Is investment important? Yes.
Is it a good idea to put money into savings? Yes.
The question is, how do we get companies to invest? Companies are not investing because consumers aren't spending. Corporations are hoarding cash, rather than expanding their workforces or performing capital investments. The way to get them to spend money is to convince them that the economy is improving. The way to do that is to get consumers to spend.
Not all companies are hoarding cash. Companies misadapted to a market where risk aversion is not insanely low are. Considering that the big companies that lack risk aversion are the ones the government often seems to have to bail out with billions of dollars, I'm not going to say this is a bad thing. Best save money (that, as said above, will be used by others via more accessible credit) than waste it. Companies just have to focus less on traditional consumer goods to offer the new things people want, or else seek to continue their line of products but find new markets for them. There's no sense in continuing to offer to people stuff they don't want to buy.
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Maybe you need to ad some big red flags to your post, as people walked right over it :P Or a siren or two for added effect.
I saw it. I'm just waiting for someone to split it. In the meanwhile, why cut the discussion?
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Moderators, splitty split please?
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Somebody split it. Bedwyr maybe? I moved it to this general talk board.