Note To Economists: Saving Doesn’t Create Savings

Is Saving a Sin?

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By Steve Roth

If you save more, if everybody collectively saves more, there are more savings, right? There’s more money that firms can borrow and invest to make us all more prosperous. Household saving “funds” business investment, so if we all save more, the world will be more productive and prosperous. You hear this all the time. And it makes sense, right?

Wrong. It’s hogwash. Incoherent codswollop. Gobbledegook faux-accounting-think. Bunkum. Think: fallacy of composition — believing something is true of the whole because it is true of the parts.

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You may know the much-discussed paradox of thrift: If everybody saves more, there’s less spending, so less income, less aggregate demand. On the surface, at least, that seems rather straightforward. But the real paradox here lies in the plural: the stock of monetary “savings” that lurks, implicit, at the core of the paradox. If we save more, are there more savings?

Start by knowing this: “Savings” (the plural) is not a measure in the national accounts, even though economists and commentators use the word ubiquitously. (Think: Bernanke’s “global savings glut.”) Search the Fed’s quarterly Z.1 report, the Financial Accounts of the United States. You’ll see. There are various measures of “saving,” with various accounting definitions — “flow” measures — but there’s no named measure of our collective stock of savings. (This makes some “stock-flow consistent” models somewhat…problematic.)

Then ask yourself:

When you spend money — transferring it to someone else in return for newly-produced goods and services — does it affect our collective monetary savings? In strict accounting terms, obviously not. Your money just moves from your account to someone else’s account; it doesn’t disappear. Your bank has less deposits; the recipient’s bank has more deposits. Aggregate monetary savings is unchanged by that accounting event. (The economic effects of that transaction — what behaviors it triggers — are another matter entirely.) One person’s spending is another person’s income. And vice versa.

But what if you don’t spend? You “save” instead, leaving the money sitting untouched in your account instead of transferring it to somebody else’s account. Does that increase aggregate monetary savings? Even more obviously not. That “act” of saving (not-spending) is quite literally a non-event.

In the simplest accounting terms, household monetary saving is just a residual measure of two flows — income minus expenditures. It’s perfectly understandable on that individual, micro level of a household. Less so in the aggregate. Because in aggregate, income = expenditures. And since saving = income – expenditures, saving must equal zero. What’s with that? (Note that in the stylized world of the National Income and Product Accounts, households only consume; they don’t invest. All household spending is consumption spending. Only firms invest, and all their spending is investment spending.)

So how does saving actually work? What does it mean to “save” — as an individual or a household, as a country, or as a world? Start with individuals, and the vernacular understanding of “household saving.”

You work your whole life, spending somewhat less than you earn (“saving”), leaving the residual sitting in your checking account. Maybe you swap some of that checking-account money with others in exchange for a deed to a house, or a portfolio of stocks and bonds, which go up in value over the years. Eventually you retire and live off that stock of “savings” (plus ongoing returns from those savings). In that everyday, individual context, savings (the stock) means “net worth” — your balance sheet assets minus your balance sheet liabilities. When you hit retirement, net worth — your savings — is the financial indicator that really matters. Bottom line: “How much money do you have?”

But what about our collective monetary savings — the stock measure that’s missing from the national accounts? That’s also best represented by aggregate household assets, or net worth. (For a sector with no externally-held assets or liabilities, assets and net worth are the same. For the world, assets equals net worth. We don’t owe anything to the Martians. The righthand side of the world balance sheet is all net worth.) For reference, U.S. household assets are about $101 trillion. Net worth is about $87 trillion. The household sector owes about $14 trillion to other sectors. (Here.)

It’s important to remember: households own all firms, at zero or more removes. A company can be owned by a company, which can be owned by a company, but households are the ultimate owners. (Firms’ liabilities are netted out of their net worth, by definition.) This because: Households don’t issue equity shares — their liability-side balancing item is net worth, not shareholder equity. Firms don’t own households. (Yet.) Companies’ net worth is telescoped onto the lefthand, asset side of household balance sheets. So household net worth = private-sector net worth. When it comes to tallying up private asset ownership — claims on existing goods and future production — the accounting buck stops at households.

The monetary measure “household net worth” is national accountants’ best effort at tallying up the markets’ best estimate of what all our real stuff is worth, in dollars. (More precisely, what all the claims on those goods are worth.) It’s far from a perfect measure; its relationship to government net worth, for instance (if that’s even meaningfully measurable), is decidedly iffy. See in particular J. W. Mason’s article on Germany’s uncanilly low household net worth. But it’s pretty much the best, maybe the only, measure we have.

So if monetary saving doesn’t increase the stock of monetary savings, how do we “save,” collectively? By producing long-lived goods — goods that we don’t consume within the accounting period. Machinists create drill presses, carpenters create houses, inventors create inventions, businesspeople create companies, economists create textbooks (yeah, I know…), teachers and their students create knowledge, skills, and abilities. All that tangible and intangible stuff that we can use and consume in the future constitutes our collective “real” wealth.

The financial system creates claims on all that stuff (and on future production), in the form of financial instruments — from dollar bills to checking-account balances to deeds on houses to collateralized debt obligations. The markets assign and adjust dollar values for those claims. When you hold those instruments, you’re holding a promise that you can purchase and consume real goods in the future. They’re claims (again at zero or more removes) on existing goods and future production. The markets constantly adjust those instruments’ prices/values based on our collective expectations of future production — our optimism/pessimism, or “animal spirits.”

With that as background, here’s the crux of the “saving” problem: Economists confuse saving money with saving corn. They conflate stocks of money (claims on stuff) with stocks of stuff. Think: “financial capital.” It’s an oxymoron. Capital is real stuff — despite Piketty and others’ inconsistent and self-contradictory use of wealth and capital as synonyms. See for instance, “capital is imported (net) to fund the trade deficit,” here. (And again, see J.W. Mason on this conundrum.)

This confution of monetary and real saving — financial instruments versus real capital — is a problem because money/financial instruments are nothing like real goods. These promises, or claims, are created with zero resource inputs to production. (Promises are cheap — actually, free.) And they are not ever, cannot be, consumed or used as actual inputs to production. (You can’t eat promises, or feed them into an assembly line.) That stock of dollar-designated claims, monetary wealth, is simply created and destroyed — expanded and contracted — by the creation/destruction of financial instruments, and their repricing in the markets.

Consumption reduces our stock of stuff. If we eat less corn, we have a larger stock of corn remaining. Consumption spending doesn’t reduce the stock of anything. If we spend less money, we still have the same stock of money.

Corn is produced and consumed. Financial/monetary wealth — the netted-out, dollar-denominated value of our web of promises and claims — simply appears and vanishes. That’s the magic of this social-accounting construct we call money.

A semi-aside on the accumulation of real, long-lived goods, real wealth: There’s another widespread though often-implicit logical accounting error that merits enthusiastic eradication. Starting with accounting definitions: (C)onsumption spending is paying people to produce goods that will be consumed within the accounting period. (I)nvestment spending is paying people to produce goods which will exist beyond the accounting period. C + I = Y (GDP, or total spending).

The error: More consumption spending means less investment spending — less accumulation of real goods, real wealth. Right? Wrong. That thinking assumes Y is fixed, which is only a given in accounting retrospect. If we spend less on consumption goods, we might just spend less, total — less Y, with no effect on investment spending. Obvious behavioral/incentive thinking actually suggests even worse: if consumers spend less, firms will do less investment spending. Both categories of spending, and total Y, will be lower (relative to a counterfactual of more consumption spending).

So what are the modern mechanisms of this relationship, between monetary savings and real goods? How do we collectively “monetize” our ever-increasing stock of real goods, our “real” savings, to create monetary savings? Three ways (none of which is “personal saving”):

1. Government deficit-spends money into existence. Treasury simply deposits dollars, created out of thin air, into private-sector checking accounts, either as transfers or in return for goods and services. This increases both private-sector balance-sheet assets, and private sector net worth — because no private-sector liabilities are created in the process. (Treasury then selling bonds, and the Fed buying them back, doesn’t directly affect private-sector assets or net worth. It simply swaps asset for asset, and alters the private sector’s portfolio mix, bonds versus checking-account deposits — though again with potential carry-on economic effects.)

2. Banks issue new loans, dollars that are also created ab nihilo. This loan issuance increases private-sector assets, but the act of lending/borrowing itself does not increase net worth, because borrowers simultaneously takes on liabilities equal to the new assets. New loans from banks only increase net worth if the leveraging later pays off (an economic effect), via mechanism #3.

3. As we create more stuff and decide that existing stuff is worth more, the financial system creates new financial instruments, and the existing-asset markets bid up prices of existing instruments (stock shares, deeds, etc.) — expanding the stock of claims to approximate the expanded stock of stuff. Market runups increase household balance-sheet assets, with no increase in household liabilities. So like government deficit spending but unlike bank lending, market runups increase household net worth. Voila, households have more money. This is arguably the dominant financial mechanism for “money printing.” (This reality highlights the pervasive “conservation of money” fallacy that still plagues even much “stock-flow consistent” thinking, a fallacy that’s beautifully explicated in this paper by Charlotte Bruun and Carsten Heyn-Johnsen. It also points out the deep conceptual problems of “income” measures that don’t include capital gains income — where “saving” doesn’t equal change in net worth.)

That Econ 101 circular-flow diagram might need some rethinking.

Over the long run, our stock of real goods and our stock of dollar-valued claims on those goods (tallied as balance-sheet assets or net worth) go up roughly together. But it’s a very long-run thing, subject to variations spanning decades, even centuries, and contingent on shifts in societal attitudes, cultural norms, institutional structures, political power, monetary policy regimes, beliefs, geopolitical forces, environmental exigencies, and technological disruptions, among other things. If Piketty’s Capital depicts nothing else, it depicts that reality.

Many things affect our collective saving and savings, real and monetary. But one thing is sure: the non-act of personal monetary saving does not increase our collective monetary savings. Personal saving does not create funds (much less “loanable funds”). That notion is incoherent, in simple, straightforward accounting terms.

Rather, the economic effects work like this: more spending causes more production (incentives matter, right?), which creates more surplus and stuff — both long-lived and short-lived — more value. The value of the long-lived stuff is then monetized by the government/financial system through the creation of new dollar-denominated financial instruments/legal claims, and price runups on existing instruments/claims.

In three simple words: spending causes saving. Real, collective accumulation of real, long-lived stuff. Monetary saving — not-spending part of your income this year — doesn’t, collectively, create either real or monetary savings.

Maybe the Demon Debt is not the Great Evil after all. Maybe Selfish Saving — hoarding of claims against others — is actually the greater economic sin.

2016 March 29

Cross-posted at Asymptosis.


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  • Duncan Cairncross

    I know he wasn’t an economist but Robert Heinlein covered this in his book
    Beyond this Horizon

    One of the most important parts was right at the start
    A simple explanation that – “The money supply should increase as the economy does”

    Which if you think of money in the economy as similar in function to blood in a body makes perfect sense
    The other side of this is that the increase in money supply is normally added directly to the basic living stipend (We could simply mail a cheque to all citizens)

    Directly from the book
    We call the system “finance” and the symbols “money”
    The symbolic structure should bear a one to one relationship
    to the physical structure of production and consumption .

    It’s my job to keep track of the actual growth of the
    physical processes and recommend to the policy board
    changes in the symbol structure to match those in the
    physical structure

    These two simple rules are the opposite of what we do
    Money supply is NOT linked to the physical economy
    The increase in money supply goes to those who hold assets
    (the 0.1%)

    • Manu

      Heinlein got these ideas from CH Douglas and his Social Credit system. Heinlein’s For Us, The Living, describes a future society that uses this system in which all citizens receive a dividend. It makes so much sense… to this day I don’t know where’s the flaw.

      • Derryl Hermanutz

        Agreed. The flaw in Douglas’ social credit was his faith in virtually omniscient technocrats to operate the social credit money and price system. Like his US contemporary (but not collaborator) Irving Fisher, Douglas (an engineer) was deeply impreseed with the new phenomenon of “price indexing”. It had recently become possible to track the prices and volumes of most goods that were produced and sold. Macroeconomic accounting was made possible.

        Douglas began by observing that prices were not — could not be — “self-liquidating”. Businesses in aggregate pay out the national earned income as their costs of production. Then businesses add markup to their cost prices, to sell their goods at profitable prices. Businesses sytematically add more “prices” into the macro economy, than they add “incomes” that are able to pay those prices. Consumers earn income only equal to cost price. So even if income earners spend 100% of their incomes buying the goods they contributed to producing, businesses will still find themselves with unsold inventories.

        At first producers kicked this can down the road by selling durable goods on payment plans: buy now, pay later. Businesses could sell their inventories, only by vendor financing the sales. Of course debt-financed spending of more than you earn today, merely robs your own future, when you have to spend your future income paying the debts of your past consumption. That future debt paydown also robs future producers who pay out those future incomes as their costs of production of a future supply of goods for sale.

        Eventually, “mortgages” became the salvation of this “Costs = Incomes so Profit is macroeconomically impossible” problem. At today’s valuations, a mortgage adds 100s of thousands of brand new dollars at a pop into the system’s spendable, earnable, savable money supply. And mortgage debtors only have to remove that money back out of the economy over a period of 30 years. So mortgages kick the can “way” down the road.

        But the road ends, eventually, in a 1929 and a 2008. And we have “financial crisis”, because there is way more debt that is owed, than there can ever be income earned to pay that debt, without bankrupting all the producers who pay out those incomes as their costs of production.

        Douglas planned to have a government monetary institution issue all of the system’s money. Like Irving Fisher, Douglas wanted to strip commercial banks of their credit-issuing privilege by which banks — in our current system — issue virtually all of the ‘money’ as bank credit. Which is all owed to banks as debt. Banks are also for-profit businesses who issue money in the amoung of loan principal, but who charge debt in the amount of principal plus interest. Interest is a bank’s “markup” on its cost-price of issuing credit-money. If debtors can’t pay interest, banks can’t earn profit. So both the money-issuing banking system, and the economic production system, systematically add more prices into the system, than they add income and money to pay those prices.

        Douglas planned to pay producers to price their outputs at below cost price, so income earners could afford to buy all the outputs and still be able to save some of their incomes. China is doing something very similar to this today. Manufacturers dump their unsellable inventories at below cost to Chinese wholesalers, who sell to Chinese retailers, who make the goods available to Chinese consumers at less than cost price. China owns its money and banking system. So if manufacturers can’t pay their state bank loans, the government can tell the banks to lend them more money to keep producing the goods that Chinese consumers want. Money is simply “created”, and government-owned banks do not have to be “profitable” in money if the government “issues” the money. So China is effectively practicing social credit finance.

        Douglas made a moral argument supporting his National Dividend that would be paid to all citizens. The great productivity of workers today is not the result of their own genius and effort so much as it is a consequence of our “cultural inheritance” of technology and infrastructure. As co-heirs of this inheritance, every citizen is entitled to receive a dividend, which enables them to purchase some of the production.

        Of course “capitalists” believe “they” own the cultural inheritance. And bankers have long owned the money issuance and allocation system. So the efforts of Fisher and Douglas and others to democratize money and economics ran up against a brick wall of deeply entrenched money and power.

        Banks issue the spendable-savable “money supply” as linked pairs of credits and debts. Earners/savers end up owning all the credits. Borrowers/spenders end up owing all the debts. These savings-debts imbalances crash the banking system. It seems capitalists prefer financial-cum-economic collapse, if the alternative is distribution of government-issued debt-free money that enables consumers to buy producer outputs at prices that are profitable to producers. Or else capitalists are really bad at accounting arithmetic. Or maybe they simply don’t “believe in” the inescapable outcomes of macroeconomic accounting arithmetic, and prefer to believe in “economic theories” instead.

        • Manu

          I don’t think any “virtually omniscient technocrat” is necessary to implement this system, just competent accountants with access to the relevant data from the firms books. Their goal would not be to control the economy or the prices, but to take an accurate picture of the physical structure of production and consumption, as Heinlein put it. If that is the only flaw, I take it any day over the disaster we have now.

  • TimHuegerich
  • Peter Holden

    Is savings truly a sin. A well reasoned argument to be sure, but if I don’t save, how am I to fund my retirement? If no one saves, how is anyone to fund retirement. Is the author arguing that pension plans are “sin”, or only funded ones?

    • Individual monetary saving is clearly valuable, necessary, even virtuous. This just tries to explain that in relationship to collective “saving.” How does the machine work?

  • Life is about risk and then risk mitigation. (to reduce the risk) Entrepreneurs are risk takers of the highest Economic order. First rule of Economic risk….money must flow. We have allowed banks to make decision on risk when a bank is no different to a coal mine. A bank supplies money to a business or Entrepreneur so a profit can be made to reduce the risk. In a social context a bank lends the money so I can provide a shelter for my family and surprize surprize my house becomes a capital asset to be exploited by banks. Now the banks can provide me with credit cards and kinds of loans to keep me in debt. Lucky ME.
    Put simply money must be circulated that is its design. Saving Money is off design. Capital on the other hand is an anti-entropy thought that can be traded back into money in the future if wanted or needed. I agree saving money is a waste on the outer hand creating capital is a life enabling act. Put Banks in there right place….. that is making sure money is in circulation. Banks are profiteering because of laws and law enforcement. Welcome to the land of the free and the home of enforcement of strange thoughts.JDS

  • Chuck Willer

    Your article explains what I have tried, and failed, to explain for years. When people put away money for retirement – there is no there there. Its simply converted into some hoped for claim on future production. There is some wealth created today that lasts into the future in the form of material things that are durable. Or, do I still have it wrong?

    • Seems right. The key is that the government/financial system creates *claims* on all our real goods. As we accumulate real goods, or realize that existing goods are more valuable than we had thought, the quantity of claims on those goods naturally increases. (New financial instruments created, existing instruments go up in price.)

      Individuals can collect (“hoard”) those claims. But the (non-)act of collecting/hoarding does not increase the aggregate quantity of extant claims. That’s a separate process.

  • BenoitEssiambre

    When I realized this is when macro really clicked for me.

    You could also say that the act of saving increases real savings iff the central bank accommodates savers by stimulating enough for new physical investment capital to be created to match the desire for savings.

    This is why western world’s central banks behavior has been so destructive in the past 8 years. By keeping money too tight, they blocked people’s savings from materializing into something real. This means that the only way this accumulation of paper savings can be honored in the future when people decide to draw them down is through redistribution from the fruit of other people’s real investments.

    Keeping central banks sufficiently accommodative puts savers in a position where their most advantageous means of maintaining their wealth is like saying to others: Here, take this money and use it to buy some tools, build some buildings, work and give us some of the product of this work in exchange.

    On the other hand, keeping money too tight is making it advantageous to savers to instead proclaim: We will hold to these pieces of paper as a claim on other people’s future wealth but won’t help finance the tools and infrastructure needed to generate this wealth, and if, even without proper tools, people manage to pull themselves by their bootstraps and create new wealth, we will use our overvalued paper to claim some of it at a discount. Is it a wonder few want to create new businesses and new jobs in this environment? It is incredibly damaging as it prevents people from helping themselves.

    With multiple large currencies in the world having too low inflation, cash itself has become a government created wealth haven for businesses and individuals.

    The rich don’t have to create value or employ people anymore to maintain their wealth. They can just sit on government paper, effectively hold on to coupons that give them right to the future output of people that are currently unemployed or underemployed without investing in the tools that would allow these people to work. Why would cash holders create jobs when central banks are giving them an artificial store of value that retains wealth at above market rates?

    What’s ironic is that those advocating tight money or austerity often use the “trying to prevent bubbles” argument. Yet by turning savings into an intrinsically worthless medium, tight money is creating an even larger and more airy bubble.

    I suppose that since it is a bubble that is managed at the central bank level, it could be one that busts in a relatively orderly manner through future economy wide inflation or taxes but it is a massive bubble nonetheless that keeps people now unemployed or underemployed and future people getting less than they were promised.

  • Borrow for a rainy day. A few households, the 1% of the 1% own the wealth. Very little of goods consumed is durable and maintains monetary value. A new hammer is $15 at the hardware store. You can get one at a yard sale for a dollar. Same utility. We’re nations issuing sovereign currency instead of debt, we’d be in better shape, providing it did not exceed the current cumulative value of the long term assets. In the global yard sale, cash will be king. Try to have some. The false valuations of the debt based balance sheet economy have enabled depletion of the natural environment, drawing so much consumption forward from the future that the collapse now underway can’t be seen in the spreadsheet.