Checkmate
I lied when I said I was done posting on this topic. But now I’m truly done. If the following doesn’t convince you folks that Wenzel/Major Freedom got off on the wrong footing, I don’t know what else would.
Major Freedom in one thread writes: “Investment and consumption, THOSE are commensurable concepts. They are both stock concepts…”
But then in the other thread he writes:
Income is flow, because it compares (say, yearly) revenues to (say, yearly) expenses over a time period.
Consumption spending is stock, because it is just the act of spending not for the purposes of making subsequent sales. Sure, you can look at consumption events over time, just like you can look at cash balances over time. But so what.
Investment is flow, because it is spending for the purpose of making subsequent sales.
I think we should all take a breather and collect our thoughts. I have now provided a quotation from Mises establishing that (a) savings is “the surplus of goods produced over goods consumed,” and (b) people can choose to save by enlarging their cash balances. I have provided a quotation from Rothbard explicitly defining saving as “the amount by which a person’s income exceeds his consumption.”
My definition is also the one used in any financial economics or macroeconomics textbook, and it is consistent with standard accounting (though accountants talk about “expenses,” not “consumption”).
Finally, as I just showed above, Major Freedom in one thread thought it advantageous in his argument with me to classify investment as a stock concept, yet in the other thread he decided to thwart my point by classifying it as a flow concept.
There is nothing more I can say on this. Best of all, if you agree with me (and Mises and Rothbard and accountants and econ textbook writers) that saving = income – consumption, and that a saver can invest in higher cash balances just as surely as he can invest in, say, T-bills, then you can still be a libertarian. Scout’s honor.
I knew you were right before it became cool.
On a more serious note, I think a lot of economists better become a lot more specific when talking about savings. Most Austrians or free market types will speak things like “savings is governed by time preference” or “an increase in savings leads to a lowering of the interest rate” and it’s erroneous. Those have to do with loanable funds – but not savings. Loanable funds are a subcategory of savings. If savings is just unconsumed output (a more precise term) – then it clearly includes cash balances as well as invested funds. The argument you had with Major Freedom, I believe, could have been mostly avoided by attempts to strictly define terms before entering into wild thought experiments with them.
Wittgenstein was right when he said that most philosophical problems are due solely to vagaries in language.
Oops, typo. Seriously. I meant to say Production and consumption, THOSE are commensurable concepts. They are both stock concepts…” NOT “Investment and consumption”
Production and consumption are stock, the difference is (net) investment, which is flow.
I mean really, after all that has been said, you’re declaring victory over THIS? I can’t make error free, perfect posts, and that’s it? Done?
I feel like a Mount Everest climber who half way up got sent back down because he wore the wrong color socks.
Is that a joke? You’re claiming I am “muddled” because I have my units mixed up, and you flat-out contradict yourself in two running arguments with me? That doesn’t give you the slightest feeling that maybe you’re wrong on this, while I (and all the textbook writers, as well as Mises and Rothbard) are right?
Your self-confidence is truly amazing. What would it take for you to say, “Wow, maybe I’ve been totally wrong in this argument?”
Oops I read your replies out of order. You’re saying it was a typo, and that’s why it’s Mt. Everest with the wrong socks? I thought you were saying, “So what that I contradicted myself, big deal?”
Anyway, last thing and I have to move on. You just now said:
Production and consumption are stock, the difference is (net) investment, which is flow.
How can the difference between two stock variables be a flow variable? I can’t believe you are accusing me of muddled thinking on this issue.
Switch it to physics or engineering or something non-economic. How can two variables, which do not have time in their dimensions, be subtracted to yield a variable with a time unit in the dimensions?
You are speaking nonsense MF. Reflect well that I don’t often tell that to people. I am not arguing for rhetorical effect here. I am saying, you are speaking nonsense. Take a deep breath and reconsider here.
How can the difference between two stock variables be a flow variable?
By being separated by two different points in time.
Switch it to physics or engineering or something non-economic. How can two variables, which do not have time in their dimensions, be subtracted to yield a variable with a time unit in the dimensions?
Production and consumption do have time in their dimensions. They each occur at definite moments in time.
You are speaking nonsense MF. Reflect well that I don’t often tell that to people. I am not arguing for rhetorical effect here. I am saying, you are speaking nonsense. Take a deep breath and reconsider here.
I sense a tone of desperation.
Oops I read your replies out of order.
There, you see? Simple mistake, no big deal, not a sign of intellectual collapse. It’s a mistake about something only tangentially related, and you don’t see me saying “See Murphy? You make a mistake about the order in which you read the replies, and yet here you are all self-confident, thinking you are STILL right about the proper theory of interest?”
I think you have me confused with Wenzel. He’s using all sorts of rather personal attacks against you. Just today he put yet another submission on his blog, calling you muddled outright. I wouldn’t do that.
>You’re claiming I am “muddled” because I have my units mixed up, and you flat-out contradict yourself in two running arguments with me?
Wow. Did I say you’re muddled or did I say that the concept “income minus consumption” is muddled? I thought I said the latter. If you thought I was saying YOU’RE muddled, then my apologies, that is not what I intended to say at all.
If you meant to say something other than income (flow) minus consumption (stock), if you typo’d, then I would say whatever.
I made a goof. Big deal. The goof I made however is about something that really has nothing to do with the main argument that started this whole thing, or the 3 criticisms of the liquidity preference theory of interest I posted, which you have avoided for something like 3 or 4 times now after repeated attempts at asking for your defenses. Remember, you were the one who initially posted a submission saying Keynes is right about interest and Mises was wrong. All I am really interested in is how you can reconcile the 3 criticisms with your conviction that Mises was wrong and that Keynes was right.
Yes, I goofed, but I’m not about to fall to my knees and thank a magical man named Jesus for showing me how awesome he is relative to me through some idiotic mistake I made. If that upsets you, then to each their own.
Your self-confidence is truly amazing. What would it take for you to say, “Wow, maybe I’ve been totally wrong in this argument?”
Somewhat less self-confidence than you are displaying with Wenzel, and somewhat more than you think I actually have.
The fact that you want to move on, after repeated attempts to get you answer the 3 criticisms on liquidity preference, can only mean that you are not as confident in it as you appear to be.
1. Under very rapid inflation, liquidity preference drops to virtually zero, and yet interest rates skyrocket to very high levels. Similarly, when inflation is more modest, liquidity preference rises, and yet interest rates are much lower. This is directly contrary to what the liquidity preference theory of interest claims should happen.
2. If it is “parting with liquidity” that generates interest, then why don’t people earn interest for “parting with liquidity” when buying consumer goods, or giving to charity? Why do only INVESTMENTS earn interest specifically?
3. Why do you assume that time preference has to be linear, such that it fails to account for an upward sloping yield curve, thus vindicating Keynes and refuting the Austrians? Why does waiting 10x longer than 1 year have to earn 10x the interest annualized? Why can’t a 10 year bond earn more annualized interest relative to the 1 year on account of people’s time preference not being linear, but exponential? Think about it. It’s easy to wait one minute to abstain from eating if you just ate. But does that mean that abstaining from eating for 1 month should be a linear function of the “sandwich preference” for that initial one minute, multiplied by however many minutes there are in 1 month? Absolutely not! The longer the time that goes by, the more intense will time preference be felt. At some point, waiting another minute for food will be so intense and so important that one would probably give their kidney, their left arm, and their life savings, if it meant they could eat at some point in that next minute. But the initial first minute was very easy to abstain from eating.
Major Freedom, I’m not bob or Daniel Kuehn, but I’ll attempt to answer as if I were as knowledgable as both.
Under very rapid inflation, desire to hold cash drops virtually to zero. As keynes laid it out, when money loses much of its store of value function, it is no longer “liquid” compared to barter goods or inflatioin indexed securities. As you may see in his three motives for liquidity preference, Keynes thought people carried cash balances to pay for ordinary transactions, and also unexpected expenses. During rapid inflation, money can’t be used like this.
So basically you’re confusing cash and liquidity, which are not necessarily the same.
There’s a difference between parting with wealth, and parting with liquidity. In the instance of buying consumer goods, you part with financial wealth and are compensated by a consumer good. In the instance of charity donation, you part with financial wealth and are compensated not at all, or only with a token NPR shopping bag and a feeling of making a contribution. However, when you buy a bond, you are not parting with financial wealth, you’re parting with liquidity for a specified period of time and in exchange you are compensated with more financial wealth.
So you’re confusing cash and liquidity, which are not necessarily the same.
In your this example the proper analogue of liquidity would be “the option to eat” and not “eating” itself.
I was going to engage with this example more, but it’s not a good enough analogy to work with…but anyway….
You’re confusing cash with liquidity, and they’re not necessarily the same thing
I meant to provide this link:
http://en.wikipedia.org/wiki/Liquidity_preference
It contains Keynes’ three motivations for preferring liquidity.
Under very rapid inflation, desire to hold cash drops virtually to zero. As keynes laid it out, when money loses much of its store of value function, it is no longer “liquid” compared to barter goods or inflatioin indexed securities. As you may see in his three motives for liquidity preference, Keynes thought people carried cash balances to pay for ordinary transactions, and also unexpected expenses. During rapid inflation, money can’t be used like this.
Money remains liquid even with rapid inflation, indeed it remains the most liquid asset. With rapid inflation, money does not cease to be money. Only hyperinflation and then currency collapse will what commodity that was money no longer become money, and some other money most likely arises.
What’s the difference between “desire to hold cash” and “liquidity preference”?
I know Keynes held that people held cash for two alleged reasons, transactions and speculation, but any and all reasons and influences for why someone would hold a given sum of money must, by the nature of the case, work their way through the individual’s value scale, and all individuals have only one value scale, and hence only one final money demand.
In addition, there are many more possible reasons than just the two Keynes suggested. Why are “ordinary” purchases and “speculative” purchases the only possibilities? And who ever defined “ordinary” anyway? People have different value scales. It is sloppy to separate “ordinary” purchases from “speculative” purchases. For some people, speculating IS “ordinary.”
There’s a difference between parting with wealth, and parting with liquidity. In the instance of buying consumer goods, you part with financial wealth and are compensated by a consumer good. In the instance of charity donation, you part with financial wealth and are compensated not at all, or only with a token NPR shopping bag and a feeling of making a contribution. However, when you buy a bond, you are not parting with financial wealth, you’re parting with liquidity for a specified period of time and in exchange you are compensated with more financial wealth.
This paragraph is convoluted.
First, ALL transactions between two parties logically imply a difference in valuation perspectives. If A trades away money for B’s consumer good, or financial security, then it means A values the consumer good or financial security by more than B, and B values the money by more than the consumer good or financial security.
Second, in both cases, the person is in fact “parting with liquidity.” You changed the context back and forth between “financial wealth” and “liquidity”, depending on what was purchased with the money, when all along it was a “parting of liquidity.” You said that by buying a consumer good, or giving to charity, one parts with “financial wealth” and in addition we are supposed to conceive of a difference between “financial wealth” and “liquidity.” But if I pay money in all three cases (consumer good, charity, bond), then I am indeed parting with my liquidity. Merely renaming “liquidity” to “financial wealth” here doesn’t change what’s going on.
Third, you deftly switched from “parting with financial wealth” in the consumer good and charity examples, back to “parting with liquidity” in the bond example. But in all three cases, I am doing the exact same thing, I am giving up DOLLARS to someone else. I am parting with liquidity. There is no basis from calling one example of parting with dollars “parting with financial wealth” while calling another example of parting with dollars “parting with liquidity.” The same thing is taking place (giving up one’s money to someone else) so it’s misleading and nonsensical to divorce the same concept into two and then pretend that by buying a bond and buying a consumer good, you are giving up two different types of objects. In reality you are giving up the same objects (money) in both cases. When you say “However, when you buy a bond, you are not parting with financial wealth, you’re parting with liquidity” you are implying that the same action of giving up ownership of one’s money to someone else, which I hold to be, and I am sure everyone else here holds to be, a “parting with liquidity”, the thing given up (money) should for some reason be called something else, where instead of “financial wealth” it should be called “liquidity.” But again, merely renaming the same thing to something else doesn’t change what’s actually going on.
Finally, The liquidity preference theory of interest specifically states that interest is earned in order to reward people for parting with liquidity. It doesn’t make any mention of HOW people go about parting with liquidity, that is, it doesn’t state WHAT specific reason the ownership of the money is given up. If it is the liquidity preference itself, if it is the desire to want to hold liquidity that leads people into wanting to be rewarded for it in the form of money interest if they are going to be parted with it, then parting with liquidity should carry a reward in the form of money interest, period. If not, if people are willing to part with liquidity and not earn money interest, then it can’t be liquidity preference that generates money interest. It has to be some other reason apart from liquidity preference.
In your this example the proper analogue of liquidity would be “the option to eat” and not “eating” itself.
Fine, change the analogy to read option to eat, not eating itself.
So basically you’re confusing cash and liquidity, which are not necessarily the same.
You said this multiple times, but you actually haven’t shown how it even relates to this issue. Cash is the ultimate liquidity. It is the final means of payment. Liquidity is a property of cash. But to say liquidity preference when it comes to MONEY interest rates, then the context of what the liquid thing is, is money, i.e. cash.
When people speak of holding more cash, they speak of a rise in liquidity preference. Preference for cash implies liquidity preference in the Keynesian framework. Telling me that cash and liquidity are not the same thing is a semantics argument that doesn’t affect any of the three criticisms above.
All of your criticisms reveal that you can’t distinguish between cash and liquidity. I’ve explained that as well as I care to…
…and your response is to say that they’re the same thing for all intents and purposes.
QED.
Everything you need to know is in Bob’s example of 1 year vs 10 year bonds. You get compensated more for saying: “hold on to this money for ten years” once, than you do for saying: “hold on to this money for one year” ten times in a row. You’re not sacrificing more consumption in the first instance, but sacrificing more options or flexibility. Seriously it’s all in there.
All of your criticisms reveal that you can’t distinguish between cash and liquidity. I’ve explained that as well as I care to…
Where? I honestly don’t see it.
I asked you what the difference is between “holding more cash” and “increased liquidity preference”, because my position is that there is no difference. Merely playing this “if you can’t see the difference than I’m not telling you!” game is not helpful.
…and your response is to say that they’re the same thing for all intents and purposes.
QED.
Oh, well, then let’s just say that you’re wrong, QED.
Everything you need to know is in Bob’s example of 1 year vs 10 year bonds. You get compensated more for saying: “hold on to this money for ten years” once, than you do for saying: “hold on to this money for one year” ten times in a row.
You can’t tell someone to hold onto a sum of money for one year, ten times in a row, today, in the present, and then call it a one year bond. You’d be investing in a ten year bond.
Why does the reward have to be linear? Time preference does not say that waiting 10 years has to carry a reward exactly 10x greater that waiting 1 year.
The yield curve does not prove or disprove either the time preference or liquidity preference theory of interest. Both theories are consistent with it.
You’re not sacrificing more consumption in the first instance, but sacrificing more options or flexibility. Seriously it’s all in there.
More options and flexibility to do what? Consume.
I read your criticisms, and claimed that your problem is that you can’t distinguish between cash and liquidity.
I attempted to point out the difference 3 times.
in retort you say that this is because there is no difference between cash and liquidity.
This is going nowhere fast.
“You can’t tell someone to hold onto a sum of money for one year, ten times in a row, today, in the present, and then call it a one year bond. You’d be investing in a ten year bond..
Look at the situation at the end of 10 years. I gave up control of my money for 1 year, ten times successively and got a little interest in exchange. You gave up the same amount for 10 years at a go, and are rewarded with more interest. but we both gave up consuming the same amount for the same time period. How come you get more interest? Well because at any year I could have chosen to cash out or roll my investment over into some other instrument . That option or flexibility is liquidity.
I read your criticisms, and claimed that your problem is that you can’t distinguish between cash and liquidity.
Yes, I know that’s what you claimed, but you have not shown what the significance of your perceived problem it with what I said. Again, I never equated liquidity with cash. I said cash is the most liquid asset. I said that by “preference for liquidity”, Keynes meant “preference for cash.”
I attempted to point out the difference 3 times.
You pointed out that there is a difference yes, but that’s all you did when it comes to that issue. Tell me what the significance of it is that actually makes my three criticisms wrong.
in retort you say that this is because there is no difference between cash and liquidity.
Where? Again I didn’t say that. You keep accusing me of saying something I never said.
In my last post, I said that holding more cash and increased liquidity preference are two different ways of saying the same thing. I even linked to a passage from Keynes that showed by “liquidity preference” he means “holding cash.”
This is going nowhere fast.
To be honest, it never really got going anywhere.
Look at the situation at the end of 10 years. I gave up control of my money for 1 year, ten times successively and got a little interest in exchange.
The yield curve is not derived from people only rolling over their investments. Not everyone invests in 10 year bonds because they would like to consume earlier, i.e. their time preference is higher.
The reason why there are 1 year bonds, instead of only 10 year bonds, is because some investors want to consume after 1 year. If every investor intended to only invest in 10 year bonds, then 1 to 9 years wouldn’t exist.
You gave up the same amount for 10 years at a go, and are rewarded with more interest. but we both gave up consuming the same amount for the same time period. How come you get more interest? Well because at any year I could have chosen to cash out or roll my investment over into some other instrument . That option or flexibility is liquidity.
You’re just repeating yourself and all this has been dealt with already.
Again, who says that time preference had to be linear? It doesn’t. Giving up consumption for 10 years doesn’t necessarily have to reward the investor with 10x the interest (annualized) as the 1 year.
You get more interest (annualized) for the 10 year relative to the 1 year (typically, not necessarily) because you are giving up consumption for longer.
You can’t pretend to be existing in the 2-9 year investment range TODAY and then say that 10 successive 1 years should yield the same as one 10 year, if the time preference theory is to be correct. That’s not how time preference works. You are ALWAYS at time = 0. Time preference is your time preference in the present, right now. It can change over time, but your time preference is ONLY manifested when you act, when you make decisions.
So when it comes to the yield curve, you have the choice today to delay your consumption for 1 year or 10 years. You don’t know what interest rates will be 1 year from now. But you know what interest rate you are willing to be rewarded for for delaying your consumption for one year, and borrowers (those who borrow from you) are not going to care what you plan on doing next year. Their business with you is what they are willing to pay you in interest for borrowing from you for 1 year or 10 years.
If they want to borrow for 10 years rather than 1 year, then lenders will have to delay their consumption for longer, and so they will typically ask for a higher interest rate, so that after 10 years, they can consume more than they otherwise would have.
The yield curve simply does not, and cannot, serve as a basis to prove the liquidity preference theory, nor the time preference theory. Liquidity and time preference theories have to be compared against each other logically, using economic principles.
I have suggested 3 criticisms of the liquidity preference theory, and your only responses thus far have been to merely reword “financial wealth” to and from “liquidity” depending on what is being purchased, and to repeat, as if repetition serves as an adequate argument, the claim that I “don’t understand the difference between cash and liquidity.”
I know the difference between the two, and nowhere have you shown me to have made a mistake. All you did was say I don’t understand the difference. That’s not good enough, sorry.
Keynes even wrote:
“the reward for parting with liquidity, is a measure of the unwillingness of those who possess money to part with their liquid control over it…”
I am just using Keynes’ own treatment of what he means by liquidity preference.
…part with their liquid control over it.
So they’re parting with their “liquid control over their money”. By phrasing it this way, Keynes is drawing a distinction between cash and liquidity.
So they’re parting with their “liquid control over their money”. By phrasing it this way, Keynes is drawing a distinction between cash and liquidity.
He is saying that “parting with liquidity” is a parting of money (cash).
I am not saying that cash is equal to liquidity. Nowhere did I equate them. I have only been saying by “parting with liquidity” Keynes meant, as the above passage makes clear, a “parting with cash.”
So what is the difference between cash and liquidity then?
why did you ask “What’s the difference between “desire to hold cash” and “liquidity preference”?”
and now you think you know the difference.
So what is the difference between cash and liquidity then?
Liquidity is a property of cash.
why did you ask “What’s the difference between “desire to hold cash” and “liquidity preference”?”
Because Keynes held that “liquidity preference” is preference for cash, and yet you are saying they are different.
and now you think you know the difference.
You have yet to explain why “desire to hold cash” and “liquidity preference” are different.
I don’t get why you guys are arguing so much over a _definition_.
I think for analytic purposes it would be better to use different words for “saving” in the sense of hoarding and “saving” in the sense of lending. Yes, it is true that people usually use the word “savings” to mean both things. But people are not economists. When you are doing economics, you use words in a formal sense, and it is usually better to use different words for different things.
Right Maurizio, we should use different words for different things. And in your comment here, you are conflating saving with investment. That’s fine for the layperson, but we’re trying to be rigorous and formal.
Saving means living below your means, i.e. consuming less than your income.
Investing means devoting resources not to present enjoyments, but to increasing your future ability to consume.
So if your income is $20 and you consume $15, you have saved $5, period. Now you can invest that savings in a T-Bill or in higher cash balances. The previous investment earns interest, the latter does not (at least a nominal rate of return). So the whole thing that started this was, Keynes was pointing out that it’s not right to say, “Interest is the return to savings,” since you can save $5 and invest it in cash balances, and not earn interest. (To repeat, you can get around this by arguing in terms of the “real” rate of interest, not nominal. That’s how Austrians should evade Keynes’ claim. They shouldn’t deny that people who consume only $15 out of an income of $20, are saving if they hold it in cash balances.)
So if your income is $20 and you consume $15, you have saved $5, period.
If your income is $20, and you take ownership of that $20, then you will necessarily save $20 for a positive amount of time, period. If you then consume $15, you haven’t made any NEW act of saving.
So the whole thing that started this was, Keynes was pointing out that it’s not right to say, “Interest is the return to savings,”
Depends on how you define saving! Keynes defined saving as both cash hoarding and investment, simultaneously. I think Wenzel has made a pretty good case that both Mises and Rothbard held them as separate.
since you can save $5 and invest it in cash balances, and not earn interest.
See, this sentence is strong evidence to me that Keynes’ writings lead to confusion.
Investment is buying for the purposes of making subsequent sales.
But in the above statement, you are, just like Keynes, defining saving as hoarding and investment simultaneously! You basically just said that taking $5 from your one hand, and moving it to your other hand, that action constitutes an “investment.” You just defined saving as hoarding and investment simultaneously, which neither Mises or Rothbard did, and who, in Rothbard’s case, went specifically out of his way to delineate.
I’m actually awestruck at how Keynesianism really can spread like a germ.
Your pretzel brain logic is impressive.
Bob is clearly saying that earning $20 and spending $15 of that $20 leaves you with $5 worth of savings. Period, end of story.
Now, if you decide to do something with that $5 that will somehow earn you interest income then the $5 becomes an investment. If, on the other hand, you decide to leave that $5 in a sock drawer, it remains savings. How can you not understand that the two different uses of that money determine whether it is $5 of savings or $5 of investment?
I appreciate the moral support JSRo8 but actually, I was saying people invest in cash balances. If Johnny earns $20 and consumes $15, but retains the $5 as cash in his wallet, there are three options:
(A) Say that Johnny saved the $5, and invested it in the form of higher cash balances. (So he invested $5 too.)
(B) Say that Johnny saved the $5, but didn’t invest it in anything, so savings > investment.
(C) Say that Johnny didn’t save anything, and didn’t invest anything.
I go with (A), MF and Wenzel go with (C). A lot of other economists go with (B).
I’m sorry if I sound like a pest chasing you across discussion threads harping on the same point every time, but count me in with MF and Wenzel on going with C.
My argument, as I have explained on the other thread, is that money is the present good par excellence. Thus, the act of not exchanging $5 for other present goods cannot be called an act of saving as we describe saving as the forsaking of consumption in the present. The $5 in hand being a present good, an exchange of one present good for another cannot be called saving.
Where do we actually disagree?
Bob is clearly saying that earning $20 and spending $15 of that $20 leaves you with $5 worth of savings. Period, end of story.
And I am saying that earning $20 immediately leads to $20 in cash “savings.”
Now, if you decide to do something with that $5 that will somehow earn you interest income then the $5 becomes an investment. If, on the other hand, you decide to leave that $5 in a sock drawer, it remains savings. How can you not understand that the two different uses of that money determine whether it is $5 of savings or $5 of investment?
Investment is savings.
Dear Bob Murphy and Bob Wenzel,
First, I enjoy observing this Murphy-Wenzel love fest – it’s been very entertaining, and thought provoking to say the least.
Second, while I know it is almost taboo to insert the name of Antal Fekete into this conversation involving those so close to mises.org, he has come up with a comprehensive theory of interest, one that I think, you both will find of interest – no pun intended.
May I point you both to:
http://www.professorfekete.com/articles%5CAEFTheParadoxOfInterestRevisited.pdf –AND–
http://www.professorfekete.com/articles%5CAEFInterestAndDiscount.pdf –AND–
http://www.professorfekete.com/moneycredit.asp ?
I hope a fruitful discussion will ensue from this…
Kind regards,
Spectre
Sorry that I missed the whole savings debate, I tried to duck out once you guys began the “interest” debate.
Personally, I think that the “Crusoe Model” would have cleared this up quite simply, that a surplus of goods over that of consumption is the origin of savings (Mises). Rothbard merely stated the same thing, but did so in the monetary sphere- money is merely another good, after all. Obviously, this gets a little more convoluted when the money-good that we are talking about is created without any real investment, labor, capital, etc. But, that is a point that I think that we can all agree on.
As for investment, I have always looked at it as if one is merely putting his income toward things in which he expects a more favorable position in the future. In other words, investment can include just about anything, just so long as it is not for immediate consumption, and that its utility and/or profit is expected in the future; it does not necessarily have to be toward ends that increase capital.
All this talk about savings reminds me of something. Isant the U.S debt=to private savings to the penny? With all this talk about he debt ceiling, lets just hope there is no deficit or debt reduction. Because of course, that would “take away our savings.” God forbid we reduced the deficit and paid back our debt. How would we be able to save? how could our economy even function without a massive budget deficit and debt?
These MMT folks never cease to amaze me. Mosler enlightens us here:
http://mikenormaneconomics.blogspot.com/2011/07/warren-mosler-so-please-dont-take-away.html
I guess our record amounts of debt and deficits just are not “big” enough. I guess if we just made them “bigger” prosperity would return. If only people understoond the wonderful world of MMT.
The only amazing thing is that you still don’t get that debt reduction is equivalent to a tax increase.
The government can reduce the deficit and pay back the debt without my taxes going up. It can and has happened before. In fact, a failure to reduce the deficit and deal with the debt will likely result in a tax increase for everyone when the government pays it back with diluted currency. So for me, it’s the other way around.
Paying down the “debt” is equivalent to raising taxes on aggregate, like it or not. Who gets taxed is another matter.
In order for the government to reduce its deficit, the private sector must start taking on debt again, or the trade deficit must shrink. Both scenarios are highly unlikely given the private sector is deleveraging and the high propensity to import.
It’s true that taxes may have to be raised in order to pay down the “debt.” However, I would argue that regardless of whether our debt is denominated in our own currency, there isn’t enough real stuff out there to satisfy all our debt plus unfunded liabilities like social security and medicare. Simply issuing currency will constitute a default in real terms as the currency loses its value over time due to inflation. The printing press is not a free lunch and certainly does not absolve us from the capability of defaulting. We can and probably will default. In real terms. Unfortunately. One could argue we have been since 1971.
The government can reduce its deficit without the private sector taking on more debt. It has happened and can happen again. The government can cut spending this year and reduce the deficit without any individual going into debt. People should deleverage but are not. The U.S imports a lot because we have a phony service sector economy financed by cheap credit and we don’t produce enough to pay for our imports, hence the trade deficit. But overall, a reduction in the government’s deficit would be a net gain for the economy as a whole.
I mean the deficit is huge and so is our debt. I thought According to MMT deficits were good for the economy right? If it’s good for the economy (and the private sector to save) to have a huge government deficit, why are we still in a recession?
Is the deficit not “big” enough? Our record deficits and debt are simply not “big” enough; if only they were “bigger” we would have prosperity?
Maybe I just don’t get it.
My last ditch attempt to salvage an agreement on this debate:
When you hold cash, the *effect* is this: you are leaving your options option. Also, with each moment, you consume some of the utility of the cash, because you lose the option value of being able to spend it during that time you waite. Furthermore, you are refaining from consuming resources from the real economy, allowing it more time to produce the output you eventually want. (Printing money and credit expansion interfer with this, in a negative way for the cash holder.)
Therefore, depending on what sense is relevant to your analysis, you can view cash-holding as saving OR consumption. It’s saving, in that it’s giving the economy “more time” to come up with a cheaper way to satisfy the desire you aim to by spending the money. But it’s also consumption, in that it eats up option value, forcing the economy to be more generalized so that it can satisfy any of the eventual desires you want to satiate by spending the money.
Any time you know what you will consume long in advance, you can generally give up some of the option value of the money by committing to consume that good. This manifests in holding a less liquid good in place of the money (e.g. voucher for a specific kind of output, as in a recent example intended to refute you). By giving up this option value, holding cash is “more saving-like” because it amplifies future output.
Any time people are less certain of what they will want in the future, they will prefer to hold their wealth as cash. (which I often argue is where our economy is now) This has the effect of signalling the economy to redirect efforts toward more mutli-purpose capital goods and modes of production. By holding on to this option value, holding cash “less saving-like” because it attenuates (the physical magnitude, but not necessarily the value of) future output. (Naturally, the government doesn’t let this beneficial process happen, and instead “fills in” this spending gap with printing money, propping up unsustainable enterprises.)
Now, can we all shake hands and give me an award for excellence in economic thought?