Wealth addiction

How, pray tell, does one profit from money "staying in banks"?

 

To not question the status quo.

The gap between those who have and those who have not is growing at an alarming rate. Why should those who "have" want to change anything?

 

I have no idea what you just said, or what it has to do with my question.

 

You're both correct, it just depends on the macro picture of the economy at the time. Savings can become spending through loans. This is what happens in a healthy economy, where just as many people want to spend as save (roughly).

In an unhealthy economy, savings are bad. Demand for spending is low, and (therefore) demand for savings is high. This means that money that gets put into a bank stays there because no one wants to take it back out as a loan (or, really, fewer people want to take it out as a loan than want to put it in as savings) so there's an excess of savings, and the paradox of thrift comes in. This is bad for the economy.

Anyway, so in sum - Savings: Usually not bad for economic growth, but bad under a specific set of circumstances.

 

All of that is true, and I appreciate some sanity injected into the conversation.

But, that said, it has little to do with Riptide's initial assertion, termed "basic economics" by 93Devil, that "wealth addicts" are currently "hoarding wealth," thereby currently stifling economic growth.

 

True. I'd argue that a lack of private demand is stifling economic growth, combined with a refusal by the public sector to step in and fill that demand gap. Companies aren't reinvesting their profits, but in the face of low demand, that's logical. Why expand capacity if there's no demand for that?

 

The "paradox of thrift" is a rhetorical device used in support of advocacy for particular policy (i.e., governmental) preferences. It obtains theoretically only under very, very narrow assumptions which (and this sends chills up my spine [/crossthread]) don't turn out to be all that supportable when one takes only a moderately broader view.

This guy* does a pretty good job of boiling down some of these issues:

http://www.econlib.org/library/Columns/y2009/Murphythrift.html


*Krugman's called this guy an idiot, so you gotta figure he's onto something ...

 

I don't know. I don't really like his analysis, because he says "communal savings increase! Because the restaurant owner can just cut his spending!" and that's a problem because that cut in spending then just eats into someone else's savings (or they pass it along to a fourth person, but eventually the buck stops somewhere, so to speak)

When he says "OK, let's look at the bigger picture" he assumes that the $200 in savings will be spent by someone else (the home builder). But this isn't necessarily true. Not if demand for savings eclipses demand for loans.

I'll admit that the paradox of thrift has an impact only in certain instances (and my understanding of the paradox, which is fairly basic, is that it's trying to describe that instance, when a mass desire to save leaves everyone poorer). In a healthy economy, my savings does get spent by that home builder. But not always.

 

I don't believe in wealth addiction. I believe that people in power generally get away with what they can economically, and the majority of our society is so fragmented and distracted by culture that people in power do, in fact, get away with what they can.

My advice to younger people is always the same: In America, the best way to speak truth to power is to make wise financial choices over and over. Control what you can control.

 

You have to be careful to keep straight just how the paradox unfolds. More savings by individuals leading to less savings by the economy as a whole... that's the paradox. It's not that saving leads to reductions in spending, it's that saving leads to reductions in saving.

 

But isn't a decrease in spending over time the mechanics that lead to the paradox (massive demand for savings -> low demand in the goods market -> low demand in the labor market -> unemployment -> further bias towards savings -> even lower demand for goods -> lower demand for labor -> higher unemployment ... wash through the cycle more times - possibly with high unemployment driving down wages, also, but that doesn't seem to happen too much in practice- -> lower savings)?

 

Remember that a massive increase in the demand for savings doesn't emerge ex nihilo: If one observes lower savings as a result of a shift in households' preferences toward savings, is the shift alone to blame? Is the overconsumption prior to the shift not at least partially responsible? And, therefore, should we not look at savings over the entirety of the business cycle?

You realize, I hope, that we're echoing a very, very big-picture argument. Keynes, Hayek, Mises, Malthus, Say ... kinda fun working their corners.

These videos, done by some folks of an Austrian-School bent, are pretty well-done:

Not to give too much away, but to me the best line in either video is in the second one: "There's no it at all."

Hope you (and others) enjoy!