A definition of "savings"
Mish to Heinz:
What in your view of things constitutes "savings"?
Is putting money into an IRA savings?
What about the gains/losses on that?
Paying down a home mortgage?
Paying off a HELOC?
Is the amount of home equity one has "savings"?
What does the government include in "savings" when they say it is .2%?
Heinz:
actually, the calculation of the savings rate is very simple - as it should be. it simply counts income minus outlays - what's left is the savings rate (expressed as a percentage of income). there has been a lot of uninformed discussion of this topic in places like the 'National Review' where the neo-cons and their friends, the Keynesians-in-drag, like to hang out. they argue that investments in stocks, changes in the 'value' (i.e., the price, actually...) of home equity, etc. should be included in the calculation to arrive at a representative number. but this is obviously nonsense. let us take the example of stocks, which are an investment , not savings.
to be able to buy stocks, one has to of course first accumulate savings. however,when you buy say 100 shares of XYZ, you give control over your savings to whoever sells you those stocks. i.e. one investor exchanges his investment for the savings of another. the essential character of the stocks thus traded as representatives of investment funds doesn't change. the fact that the price of said stock has e.g. increased obviously can NOT increase the pool of savings (since the price increase is the result of a multitude of transactions in which savings that have already been counted toward the savings rate are exchanged for stocks).
a brief on-topic excursion:
the Austrians actually look at a different form of savings , one that excludes the monetary component. this is not relevant for the savings RATE, but it is in terms of determining whether savings suffice to expand the production structure of the economy. this is often referred to as the 'pool of real funding' - an extremely important economic concept that unfortunately eludes statistical capture.
to explain what it is, consider a Crusoe economics example. say you're John and you live on an island. you subsist on a diet of apples, which grow on your apple tree. you need 20 apples a day to survive. one day you realize that by making a tool you could increase your harvest by 50%. however, making the tool takes time - say a day. that means you have to save 20 apples to be able to do so. for 20 days you therefore subsist on 19 apples a day - the 20 apples left over are your 'subsistence fund' - the pool of real savings, that allows you to invest in making the tool. once the tool is made, and you harvest 30 apples a day, your subsistence fund grows by 10 apples a day - the pool of real funding grows, and thus the production structure can be lengthened further, and so on.
if you now begin to trade some of your apples for the products made by another island inhabitant, you use them as money. obviously, if you and the other dude decide to use a certain commodity as money, this does nothing to change the essential fact that only the pool of REAL funding supports your economic activities. if you consume more than you produce, the pool of real funding begins to shrink. a shrinking pool of real funding leads eventually to a shortening of the production structure, and a diminishing division of labor (the division of labor flows from the lenghtening of the production structure). you are in fact then eating the seed corn. this is precisely why the low US savings rate is a cause for concern.
monetary pumping can only create a make-believe economic upswing as long as the pool of real funding still grows. it follows that the entire theoretical foundation of modern day mainstream economics is complete baloney - since it holds that monetary pumping can 'grow' the economy. it can do no such thing. the actual size of the money supply is irrelevant to wealth creation. it is the pool of real funding which determines whether economic growth is possible or not.
if we decided for instance to use a completely fixed stock of gold as our money supply, then the purchasing power of one unit of this money would rise over time. if the stock were not fixed, but grew by roughly the same percentage as our collective economic output, purchasing power of one unit would remain relatively stable. if we introduce a central bank and paper money , and the CB decides to print a lot of 'money' willy-nilly, purchsing power of one unit will decline over time. however, the creation of money out of thin air has other insidious effects that are not visible at first glance. the problem is that it allows for consumption WITHOUT preceding production.
let's go back to the Crusoe economics example: if John wants to vary his diet by purchasing fish from Jill, he needs to take apples from his subsistence fund and exchange them for Jill's fish. he must first
PRODUCE apples, before he can consume fish. a third inhabitant,
Alan, proposes that instead of bartering fish for apples, they should all use the gold produced by his gold mine next door for the purpose of economic exchange. since both John and Jill like gold ornaments, they agree. iow, they regard gold as a useful commodity - and Alan has successfully argued that due to its divisibility, durability and fungibility, it makes for a far better money than perishable apples and fish.
as time passes, Alan proposes that in order to make the payment system more efficient, he will store everybody's gold in his vault and issue receipts for it. that way no-one needs to lug around bags of gold coins, but they can instead exchange the receipts. you see where this is going - if Alan decides to issue more receipts than there is gold in his vault (i.e., he begins the fraudulent enterprise known as a 'central bank') , he will be able to consume without having to first produce (aside from producing essentially worthless paper receipts that is). in this example it becomes easy to see that a plethora of harmful effects is likely to follow. for one thing, the pool of real funding is now liable to shrink rather than grow, since Alan is now able to exchange something for nothing - and consume the something for free. also, the sudden proliferation of receipts does not immediately become apparent to everyone involved. at first, the remaining producers of real wealth erroneously believe that demand for their products has increased naturally, and they accordingly expand production. but the increase is artificial - iow, it seduces them into making malinvestments, which further weakens the pool of real funding over time. in short, the whole fraudulent system only 'works' as long as wealth creation manages to continue IN SPITE of it - not, as statists of all stripes hold, BECAUSE of it.
this is why i always point out when modern day economic imbalances are discussed, that all the busy-bodies with their long laundry lists of prescriptions of how to 'fix' things (like e.g. that absurd 11-point list emanating from PIMCO) continually miss the mark - they refuse to recognize, let alone debate, that the root of the imbalances is the monetary system itself.
when monetary and fiscal pumping failed to produce an economic upswing in post bubble Japan , Austrians knew that Japan's pool of real funding had begun to shrink. it was not possible anymore for the central bank to get its artificial demand machine into gear - once the pool of real funding is in dire straits, no amount of addtional paper chits can 'rescue' the economy in question. the arduous process of liquidating the malinvestments stemming from the preceding boom has to first run its course.
one would have thought that the utter failure of Keynesian policy prescriptions In Japan in the wake of the bust would lead to a rethinking of the premises leading to the failure. not so. instead, the past 15 years have passed with economists constantly demanding MORE OF THE SAME, and in spades please! naturally no-one wants to admit that they essentially know nothing and have been wrong their entire life...that the most basic assumptions they have taken for granted are in fact nothing but hot air. so it is not that their prescriptions are nonsense, it must be the half-hearted implementation of same that's at fault! in short, Japan has been harrassed (not that its policy makers needed a lot of encouragement actually...) into compounding its mistakes manifold. it now sports the biggest ratio of public debt vs. GDP of all the industrialized nations, with NOTHING to show for it. the solution? MORE OF THE SAME PLEASE! print more money, and increase your debt further - the standard response of today's economists to every perceived economic ill.
i must add though that this PIMCO nut of yesterday is adding fresh twists in terms of guaranteed-to-fail interventionist proposals that go to show that people's ingenuity in going forcefully down the path
of economic ruin truly knows no bounds.
where do they find these people? we can conclude that the pool of statist fools is definitely NOT shrinking. |
