Right, money needs to circulate to everyone so that people can afford to spend their lives on other than subsistence work. Saving primarily benefits the saver (secondarily those who take out loans).
To my knowledge just giving people who need it money doesn’t encourage them to save it, but rather to spend it on what they need, which actually stimulates the economy. This is far more beneficial than leaving it as idle capital or in a savings account.
Fix monetary policy so that people would be able to save in liquid assets rather than financing everything and living month to month. As an individual's savings rise, their autonomy increases while the marginal utility of an earned dollar decreases. They'd naturally demand a higher salary.
If that job wasn't worth that much to an employer, either the cost of the resulting service would rise or the job wouldn't get done, just like now.
Wait, can't a worker also be a saver? That seems like a false dichotomy to me, and what you're really suggesting is that monetary policy should encourage the accumulation of debt(spending) rather than careful insulation from chance(saving).
Governments and low-net-worth individuals spend every penny they have, which keeps the economy moving, which creates jobs. The idea that giving all the money to a few individuals to hold will work out better for everyone is very hard to rationalize, although it's understandable they like to repeat that notion.
"Spending supports production of goods and services in the present, including the jobs necessary to produce those goods and services. Saving helps build the capital base that can be used to increase production of goods and services in the future."
Saving is also mandatory for people who aren't already rich to be able retire and deal with other crises in life where you need significant money (for example unemployment or health problems).
From what I remember of econ 101, if people are saving more, that should mean more deposits in banks which should then provoke banks to lend more out - easing the credit crunch, which should then lead to more spending, etc so in the long run the extra saving should actually help the economy, no?.
You've hit upon the most important and possibly most overlooked point in macroeconomics. At the level of the whole economy, modulo things like inventory, there's no way for aggregate savings to be anything other than aggregate consumption + investment. Every good or service is produced by someone and consumed by someone else. If you don't have both parties, there's no transaction.
When you "save" money, it's essentially a claim check against someone else's income. It's a way of recording that you contributed more than your fair share to the economy this time, so at some time in the future, you have the right to consume more than your fair share.
If everybody contributes more than their fair share, who's using up the excess? And then if they all go to cash in their claim checks at the same time - say, when the baby boomers retire - who'll produce the goods and services needed to satisfy those claim checks?
I'm not sure in aggregate everyone is able to save their way to prosperity. There must be places for the capital to be deployed. A lot of savings end up going in to speculation which basically could be classified as gambling or waste. Take a look at China right now, a country with an incredibly high savings rate but much of it going to speculation.
The better problem to look at is what the savings are being spent on: investments that raise the quality of living for everyone.
Savings does exactly that. You’re money doesn’t just sit in the bank, the bank loans it out to people engaging in economic activity, businesses that want to expand, buy inventory, etc.
When you save the dollar you don't immediately increase wealth of society, that's true.
But there's more to that: if you save a dollar and still manage to get on with your life then it's clear that you didn't need that dollar in the first place. Spending it right here right now would be a waste of it.
So instead you put your dollar in a bank, and bank lends it to someone who needs it. Preferably to some business that is going to invest and expand. So, saving is a process of transferring money to people that can put to the best possible use.
Contrast that to what we are told by mainstream economists: they encourage mindless spending, even to the point of going in debt, which means that your dollars would be wasted on overpriced things that you don't really need, and might even be bad for you (like when you buy cigarettes or alcohol, or shiny new smart phone). That's a recipe for disaster: inflation, market bubbles and crises will follow.
I'm not sure I follow your argument. Don't most savers put their money in banks who then have to redeploy it to make a profit? In fact, isn't it more useful to have banks utilize this capital instead of a crowds of ordinary people moving small sums? Banks aggregating wealth to be redeployed seems more efficient.
Contention: The cultural assumption that saving ought to be rewarded is misguided.
Reasoning: When a bank lets you transform production today into future consumption, it's performing a valuable service for you. Storing your value takes work and the bank deserves to be paid for that service. However, historically, they charged a negative price for this service (positive interest rates), because this service allowed them to make even more money letting other people transform their future production into present consumption. But as fewer people need to borrow and as more people want to save, the market clearing price of savings is approaching and in and cases overshooting 0%.
Extrapolation: There's a fair chance this will be a big deal in the history books we write a century from now. Today's bond prices are telling us that the world is changing. We are going from a world of relative growth, where we needed to delay consumption to juice investment, to a world of a relative stasis, where consumption and investment are in equilibrium. Everyone who said interest rates would bounce back to "normal" after the Great Recession has been wrong. This may be the new normal.
That’s not how economies work. Money _circulates_. If you’re a sink, you’re also a source (as long as you don’t sink money into inflating some financial bubble instead of buying actual services)
So in general it’s the opposite, taking money out of bubble sinks and giving to people who will spend it on services will cause more circulation, not less.
But it can be used efficiently or inefficiently. For example, if there are two bread bakers, and I can pay $10 to one and he makes two loaves, or $10 to the other and he makes one, then the money has not disappeared but one use produced more goods for society.
>Money always trickles back up, especially when it's put into the hands of low income people who tend to spend more than they save.
Where do you think savings goes? It is most certainly invested back into society, and is not generally spent on consumption. Giving money just so people can consume will mostly make more of the goods they consume. If you want future looking invention and innovation, you need savings that can be lent to startups, businesses, and other uses.
reply