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Posts Tagged ‘Savings’

This Is How Savings and Investment Pave the Way for an Advanced Economy | Mises Wire

Posted by M. C. on August 15, 2021

The state of the subsistence fund determines the quality and the quantity of various tools that can be made. If the fund is only sufficient to support one day of work, then the making of a tool that requires two days of work cannot be undertaken. The size of the fund sets the limit on the projects that can be implemented. It also means that the size of the fund determines the so-called economic growth.

https://mises.org/wire/how-savings-and-investment-pave-way-advanced-economy

Frank Shostak

To maintain his life and well-being, an individual must have at his disposal an adequate amount of consumer goods. These goods, however, are not readily available. Without tools at his disposal and by means of his bare hands, the individual can only obtain from nature very few goods for his survival.

For instance, take an individual John, stranded in a forest. In order to stay alive, he can only pick up some apples from an apple tree. Apples are the only good available to him that can sustain him. Let us say that by working twenty hours a day, he manages to secure twenty apples, which keep him alive. The twenty apples that John has secured from nature is his subsistence fund, which sustains him (see also on this Rothbard)[1].

John realizes that if he had a special stick this would allow him to become more productive. His daily production of apples could be forty apples (i.e., double his current production). The problem, however, is that the stick is not available—it must be made. To make the special stick requires two days of work. If John were to decide to make the stick, he would have a problem. By spending his time on making the stick, he would not be able to pick up the apples that are required to keep him alive.

The only way out of this predicament is for John to put aside an apple a day for the next forty days. By saving an apple out of his daily production and enduring hunger, after forty days he will have an adequate stock of apples that will sustain him while he is busy making the stick. (We make the unrealistic assumption here that apples can be preserved in edible form for forty days). Thus, after forty days, the John’s subsistence fund will be comprised of forty apples, which will see him through while he is making the special stick. We can see here that the saved or unconsumed forty apples enable the making of the stick, which raises the production of apples and lifts John’s living standard.

Note that the making of the stick is a burden—John has to make a sacrifice and save forty apples thereby endangering his health and well-being. However, the stick will allow him to double his production of apples. If he continues to consume twenty apples a day, this will allow John to increase his subsistence fund. With a larger fund, John could consider allocating his time to make some other tools to enhance his life and well-being.

The state of the subsistence fund determines the quality and the quantity of various tools that can be made. If the fund is only sufficient to support one day of work, then the making of a tool that requires two days of work cannot be undertaken. The size of the fund sets the limit on the projects that can be implemented. It also means that the size of the fund determines the so-called economic growth.

According to Richard von Strigl

Let us assume that in some country production must be completely rebuilt. The only factors of production available to the population besides labourers are those factors of production provided by nature. Now, if production is to be carried out by a roundabout method, let us assume of one year’s duration, then it is self-evident that production can only begin if, in addition to these originary factors of production, a subsistence fund is available to the population which will secure their nourishment and any other needs for a period of one year…. The greater this fund, the longer is the roundabout factor of production that can be undertaken, and the greater the output will be. It is clear that under these conditions the “correct” length of the roundabout method of production is determined by the size of the subsistence fund or the period of time for which this fund suffices.[2]

The essence of the subsistence fund with respect to an individual, John, can be widened to include many individuals that trade with each other.

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MMT’s Very Odd Definition of “Savings” | Mises Wire

Posted by M. C. on August 1, 2020

You can define the word “savings” to mean anything you want. MMT savings defined as net government debt holdings enables the MMT tautology that the private sector cannot MMT save without the government running a deficit. However, this does not tell us anything useful. If anything, MMT saving should be discouraged, because the government drains resources from the domain of economic calculation and private property to socialism and government control. The focus should be on economic policies that enable private individuals and business firms to accumulate gross savings in order to improve our well-being.

https://mises.org/wire/mmts-very-odd-definition-savings?utm_source=Mises+Institute+Subscriptions&utm_campaign=a7b746240b-EMAIL_CAMPAIGN_9_21_2018_9_59_COPY_01&utm_medium=email&utm_term=0_8b52b2e1c0-a7b746240b-228343965

Modern monetary theory, which is now experiencing its fifteen minutes of fame, contains a number of strange and counterintuitive propositions.1 Proponents claim that these propositions are not an economic theory, only an accounting identity. One of these is that the private sector can save only if the government runs a deficit. Within the self-consistent, tail-chasing world of MMT, these statements are true by definition. However, when MMT aphorisms are interpreted using their normal meaning in the English language, their conclusions are not only false, but foolish.

MMT defines savings as the accumulation of non–private sector assets. It must be the case that all liabilities between private sector actors net out to zero. And from that, the only way that the private sector can have a positive net credit is if something outside of it has a negative net. That something is the government (perhaps, but probably not so, as I will argue later).

The Definition of Saving

A good definition enables people to have a conversation about a topic by establishing a shared meaning. While anyone is free to define “up” to mean down and vice versa, Humpty Dumpty notwithstanding, a good definition, to avoid confusion, should be consistent with normal usage. In normal English, savings consist of what is produced and not consumed. I will show that using this definition it is possible for the private sector to save without a government deficit.

The first and simplest form of savings is saved consumption goods. Long duration goods such as homes, cars, appliances, clothing, and furniture are produced and then release their services over time. The US private sector has about $33 trillion of residential real estate, which consists of saved real estate services in the form of homes that will be used up over decades. Shorter duration consumption goods can also be saved, such as frozen food or tinned sardines, extra tubes of toothpaste, and in the days of the virus we must not underestimate the importance of saved toilet paper. Businesses also have saved inventories of consumption goods which they plan to sell in the near future.

The Role of Saved Capital Goods

The second and more important form of savings is saved capital goods. These are productive assets which, in the exact same way as saved consumer goods, have been produced but not consumed. According to the Fed, the United States has $56 trillion of saved capital goods. Some of that might be owned by governments, but even a fraction of the value held in private hands is an enormous amount. The importance of capital goods is that they are needed in order to produce consumption goods. Labor productivity depends on the amount of capital that workers have, which drives real wages. The gradual increase in our standard of living over the centuries is attributable to the quantity and quality of saved capital goods.

Even the Robinson Crusoe stranded on an island may save consumption goods such as caught and dried fish, harvested and stored coconuts and tubers. Crusoe may also save capital goods—such as a fishing rod, a net, or a ladder to harvest coconuts from trees—by creating them faster than they wear out.

Savings and Cash Balances

Another common usage of the term “savings” is cash balances. While MMT correctly points out that one person’s spending is another’s income, and therefore nets out to zero, the private sector cannot accumulate a net cash balance unless there are money flows in and out of it. In a gold monetary system, the private sector could accumulate cash through mining. But assuming for the moment that there are no cash flows between the private and government sector, and no money creation, the private sector cannot net accumulated cash. However, the private sector can increase its real cash balance through lower prices. This happens when the public preference for cash relative to goods changes in the cash direction.

The Problem with the MMT Definition of Savings

At this point we can see the main problem with MMT’s definition of savings as net government debt. Assets can be divided into two broad categories: debt and equity (equity being what you own and debt being what is owed). Every debt has two sides: the creditor, for whom it is an asset, and the debtor, for whom it is a liability. Net debt must balance to zero if you include both sides in your aggregate. Equity, being unencumbered, and having only one side, is a positive value, and can grow. An increase in one person’s equity in the form of saved capital or consumer goods does not require an offsetting debit anywhere else. To see this, consider Robinson on his ancap island, busily drying fish and storing coconuts. His gross equity increases on a daily basis without any offsetting liability anywhere in the South Pacific. MMT’s definition is incomplete, because it looks only at the debt component of assets while ignoring the equity.

Private sector net debt is always zero by definition. This truism tells us nothing interesting about the world and is only another way of stating the definition of debt. Private sector gross assets in the form of saved capital and consumer goods are the foundation of our economic well-being and are therefore quite important. Contrary to MMT, the proper object of study should be gross savings rather than net savings. Net assets in the form of external debts to foreign countries are not uninteresting for some purposes, but must be paid for out of either current or future production, which depends on the gross savings.

Now I will return to the issue of whether the private sector’s net position in the government debt market is truly an asset. Government debt could in theory be paid by selling government assets (and in some cases they have done so) but in most cases, government debt represents a claim on the taxing power of the government in question. And the tax liability is to a large extent owed by the same private sector that owns the bonds. Every increase in government debt imposes a future tax liability of the same amount on the same private sector. If we disaggregate down to the individual or household, some individuals owe more in tax than they own in government bonds, and others the opposite. While I am not a believer in Ricardian equivalence, the net positive asset position of the private sector in government bonds is offset by an equal tax liability on the aggregate level.

Many parts of MMT depend on the issuer of debt also being the monetary sovereign—the body that can create money out of nothing. It should be noted that this particular issue does not apply only to the issuer of government money. As long as the definition of the private sector excludes all governments of any level who borrow in the bond market, the same accounting identity applies. State and municipal governments could create MMT savings by borrowing. MMT might dispute my point about sovereign debt imposing a tax liability on the private sector on the grounds that the monetary sovereign can print and spend money into existence “for free” (i.e., without imposing any cost on the rest of society). I will not address that point here, but Robert Murphy has elsewhere.

Capital goods and consumer goods can be accumulated without any requirement in an accounting sense for obligations between the government and the private sector. If the government had no debt, it would enable the private sector to accumulate even more savings, because it would be freed of the tax liability.

You can define the word “savings” to mean anything you want. MMT savings defined as net government debt holdings enables the MMT tautology that the private sector cannot MMT save without the government running a deficit. However, this does not tell us anything useful. If anything, MMT saving should be discouraged, because the government drains resources from the domain of economic calculation and private property to socialism and government control. The focus should be on economic policies that enable private individuals and business firms to accumulate gross savings in order to improve our well-being.

  • 1. See Dan Sanchez, “War Is the Health of the…Economy?,” Dan Sanchez (website), July 3, 2014, http://www.dansanchez.me/feed/war-is-the-health-of-the-economy. “A more likely explanation is indicated by Cowen’s participation in the fad of ‘pop economics,’ inaugurated by the 2005 bestseller Freakonomics: A Rogue Economist Explores the Hidden Side of Everything by Steven Levitt and Stephen Dubner. A characteristic feature of this fad is the concoction of novel, attention-getting, semi-scandalous, quirky arguments, that are purportedly ironclad in spite of how counter-intuitive they are. Such intellectual curios help burnish the image of pop economists as ‘rogue’ iconoclasts and provide hipness to a profession otherwise generally considered staid and ‘dismal.'”
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Central Bankers Have Declared War on Your Savings | Mises Wire

Posted by M. C. on December 2, 2019

Recently, European Central Bank (ECB) President Christine Lagarde bemoaned their surpluses, complaining that they would be better off spending the money on infrastructure and education. Desperate for a modicum of growth, Lagarde is of the philosophy that the only way to grow an economy is through government intervention.

https://mises.org/wire/central-bankers-have-declared-war-your-savings?utm_source=Mises+Institute+Subscriptions&utm_campaign=adfd4f6c6d-EMAIL_CAMPAIGN_9_21_2018_9_59_COPY_01&utm_medium=email&utm_term=0_8b52b2e1c0-adfd4f6c6d-228343965

…Lagarde is a proponent of the NIRPs , championing the unconventional mechanism to achieve growth. Since the eurozone has barely cracked 2% GDP, many are anticipating that Lagarde will deepen negative rates during her term as president. Anytime she has mused on the subject, Lagarde has usually dismissed concerns about the saver, noting that they are also consumers, borrowers, and workers.

Unfortunately, this contempt for savers is commonplace because it is antithetical to the Keynesian approach of spending. Disciples of John Maynard Keynes will contend that consumption over saving should only happen during the bust phase of the business cycle, but if you peruse any opinion pieces by individuals subscribing to this ideology, you will only come across spending prescriptions for every type of economy – boom or bust. They dismiss the fact that capital accumulation, not consumption, creates wealth.

This myth originates from Keynes’ The General Theory and Treatise on Money, in which he posits that a saver is reducing the income of another person because he or she is not consuming the goods or services extended by somebody else. Put simply, he considered saving a self-defeating act.

“Saving is the act of the individual consumer and consists in the negative act of refraining from spending the whole of his current income on consumption,” he wrote.

The crusade against savers has been prevalent in the Democratic primary. The likes of Sen. Elizabeth Warren (D-MA) and Sen. Bernie Sanders (I-VT) have grieved about hoarders , particularly those who are the top 0.1% (no longer just the 1% anymore; likely because these two people are the 1%, too). The presidential candidates are perturbed that the supposed capital hoarders are not putting their fortunes into the economy. This is nonsense talk to justify their wealth confiscation policies, since the affluent are saving and investing, not just stuffing their money under mattresses.

Negative rates, higher taxes, and inflation – the statists are employing every measure to gain access to the fruits of your labor…

If you don’t like it, then you are out of luck. You have nowhere to go. The globalists have declared war on mom and pop savers, pillaging bank accounts and conquering our lives. Is there a chance for victory? As long as the omnipotent and iniquitous institutions remain in charge, optimism over sound economics can only fade to black.

Originally published by Liberty Nation.

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