Real World Economics

[egamma]

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.

[Chenier]

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.

[Lefanis]

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.

[De-Legro]

...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.

[Chenier]

...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).

[Vellos]

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.

[Silverhawk]

Anyone who believes you can have infinite exponential growth on a finite planet is either a madman or an economist. 

, 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

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 Or a siren or two for added effect.

[egamma]

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.

[Chenier]

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.

[Chenier]

Maybe you need to ad some big red flags to your post, as people walked right over it 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?

[JPierreD]

Moderators, splitty split please?

[Indirik]

Somebody split it. Bedwyr maybe? I moved it to this general talk board.