Paradox of Thrift

[doodle]

I understand the viewpoint of the article but don't necessarily agree with it since there are multiple routes to get to retirement/financial independence. I find it sad that you look at the overall savings rate. Currently we're at 5%. Based on the posting from Tyler/Mr.Money Mustache (http://www.mrmoneymustache.com/2012/01/ ... etirement/), that's putting it at 66 years of working to get to "retirement".

That's a long time to work and I think the bigger issue is proper savings over the years of accumulating versus your investments growing enough to carry you through retirement.

Except that one person's spending is another person's savings.

[Greg]

I understand the viewpoint of the article but don't necessarily agree with it since there are multiple routes to get to retirement/financial independence. I find it sad that you look at the overall savings rate. Currently we're at 5%. Based on the posting from Tyler/Mr.Money Mustache (http://www.mrmoneymustache.com/2012/01/ ... etirement/), that's putting it at 66 years of working to get to "retirement".

That's a long time to work and I think the bigger issue is proper savings over the years of accumulating versus your investments growing enough to carry you through retirement.

Except that one person's spending is another person's savings.

I respectfully disagree with your statement. It's not a zero-sum game. We're defined by the goods and services we create. I posit that there are a lot of efforts out there that people are conditioned to believe they need and they use their abilities to purchase said goods and services.

We all have the freedom to choose what we want to buy, but I feel people are swayed to buy things they don't truly need and as a society, we are impacted negatively by this. Also as a by-product of buying things we don't need, we also produce a lot of waste which is no good either.

But this is a thread tangent and should probably be taken elsewhere if we'd want to discuss the pros/cons of the paradox of thrift.

[doodle]

I understand the viewpoint of the article but don't necessarily agree with it since there are multiple routes to get to retirement/financial independence. I find it sad that you look at the overall savings rate. Currently we're at 5%. Based on the posting from Tyler/Mr.Money Mustache (http://www.mrmoneymustache.com/2012/01/ ... etirement/), that's putting it at 66 years of working to get to "retirement".

That's a long time to work and I think the bigger issue is proper savings over the years of accumulating versus your investments growing enough to carry you through retirement.

Except that one person's spending is another person's savings.

I respectfully disagree with your statement. It's not a zero-sum game. We're defined by the goods and services we create. I posit that there are a lot of efforts out there that people are conditioned to believe they need and they use their abilities to purchase said goods and services.

We all have the freedom to choose what we want to buy, but I feel people are swayed to buy things they don't truly need and as a society, we are impacted negatively by this. Also as a by-product of buying things we don't need, we also produce a lot of waste which is no good either.

But this is a thread tangent and should probably be taken elsewhere if we'd want to discuss the pros/cons of the paradox of thrift.

Right, but we were talking about saving money....not potatoes. And in the case of a fixed money supply it is a zero sum game. Debt credit expansion I don't think changes this as increases in the money supply are cancelled out by their accompanying liability.

[Xan]

If you're talking about stuffing wads of cash under a mattress, then maybe that's a zero-sum game.  Most saving is in other forms.

[doodle]

If you're talking about stuffing wads of cash under a mattress, then maybe that's a zero-sum game.  Most saving is in other forms.

Not following......Even in the form of business investment...that investment is predicated on consumer spending. I don't see how one escapes this

[Greg]

If you're talking about stuffing wads of cash under a mattress, then maybe that's a zero-sum game.  Most saving is in other forms.

Not following......Even in the form of business investment...that investment is predicated on consumer spending. I don't see how one escapes this

If everyone in America started working 20% harder than they did before, are we saying we couldn't be producing more goods and services? If we produce more goods and services, should we have more money then to spend relative to other countries because we are wealthier due to the goods and services?

[doodle]

If you're talking about stuffing wads of cash under a mattress, then maybe that's a zero-sum game.  Most saving is in other forms.

Not following......Even in the form of business investment...that investment is predicated on consumer spending. I don't see how one escapes this

If everyone in America started working 20% harder than they did before, are we saying we couldn't be producing more goods and services? If we produce more goods and services, should we have more money then to spend relative to other countries because we are wealthier due to the goods and services?

I don't see how that affects the amount of money people are able to save. Sure we have more goods and services which at the end of the day is real wealth, saving money seems to be a zero sum game to me. You can't save the money someone else doesn't spend.....or can you?

[Greg]

I don't see how that affects the amount of money people are able to save. Sure we have more goods and services which at the end of the day is real wealth, saving money seems to be a zero sum game to me. You can't save the money someone else doesn't spend.....or can you?

You're right. Goods and services is real wealth, but I think there is a difference on what you end up spending your savings on. I might save my dollars now to pay for something useful in the future such as a house, etc. rather than something not useful like a car-wash ever week. Ultimately by having more people save, I think you'd have a fundamental change of what people end up doing for their work. The money would be then flowing to only those that are producing the real value within the society.

Couldn't proper savings for high value items later be more useful to society than using that said money on less-valuable goods and services produced by society? Because of this, it expands the pie towards creating only the high value items that people in America (and elsewhere in the world) not only want but really need as well.

In short, I think we believe we have many "needs" that are actually "wants" and that damages society in my eyes. Whether that is true or not could use some discussion. But again, I'm trying not to hijack this thread into a totally separate topic than why the PP is dead.

[Pointedstick]

I completely agree with Greg. Savings are just deferred spending, and simply change the composition of what's produced and when.

[doodle]

And if everyone decides to start saving 50 percent of their income? How would that play out? Im assuming there would be quite a few layoffs and layed off people have trouble spending which makes it difficult for working people like me to continue saving. I understand the saving is deferred spending argument, but with a fixed money supply saving seems like it has to be a zero sum game. We cant all save 80 percent of our income if we still want to have jobs. And without jobs how does one save?

[Greg]

And if everyone decides to start saving 50 percent of their income? How would that play out? Im assuming there would be quite a few layoffs and layed off people have trouble spending which makes it difficult for working people like me to continue saving. I understand the saving is deferred spending argument, but with a fixed money supply saving seems like it has to be a zero sum game. We cant all save 80 percent of our income if we still want to have jobs. And without jobs how does one save?

To a certain extent, for those that lost their jobs, doesn't that indicate to a certain extent that society showed they do not need those goods or services, and were perhaps a "want" versus a "need"? Then those people have to find another way to provide value to society to keep themselves making money and such. With this approach, it'd be painful (because change is painful), but ultimately it'd help to weed out a lot more of the wants of society and provide for a much more robust society where we focus on the needs. I feel like now our society focuses too much on our wants to our own detriment.

It's also one of the reasons why in my mind due to wants, we buy a lot of stuff from other countries so we get trade imbalances.

[Pointedstick]

I understand the saving is deferred spending argument, but with a fixed money supply saving seems like it has to be a zero sum game.

But we don't have a fixed money supply. Not even close.

[doodle]

And if everyone decides to start saving 50 percent of their income? How would that play out? Im assuming there would be quite a few layoffs and layed off people have trouble spending which makes it difficult for working people like me to continue saving. I understand the saving is deferred spending argument, but with a fixed money supply saving seems like it has to be a zero sum game. We cant all save 80 percent of our income if we still want to have jobs. And without jobs how does one save?

To a certain extent, for those that lost their jobs, doesn't that indicate to a certain extent that society showed they do not need those goods or services, and were perhaps a "want" versus a "need"? Then those people have to find another way to provide value to society to keep themselves making money and such. With this approach, it'd be painful (because change is painful), but ultimately it'd help to weed out a lot more of the wants of society and provide for a much more robust society where we focus on the needs. I feel like now our society focuses too much on our wants to our own detriment.

It's also one of the reasons why in my mind due to wants, we buy a lot of stuff from other countries so we get trade imbalances.

I don't disagree with you at all. I just think that there is a difference between goods and services and the money that we use to represent them. Just like there is a difference between the map and the territory or the menu and the meal. So I can see that the actual production of goods and services is not a zero sum game, but money is like gold. There is a certain fixed quantity and what I choose to save cannot at the same time be spent.

Even if I choose to invest my savings in a business that produces real products, that investment is predicated on other people spending their money to buy my goods. If everyone in my city saved like I do then 99% of the businesses would close which I would imagine have an impact on me and my business and hence my ability to continue saving.

[doodle]

I understand the saving is deferred spending argument, but with a fixed money supply saving seems like it has to be a zero sum game.

But we don't have a fixed money supply. Not even close.

But every loan or credit is cancelled out by a debt or liability.

[doodle]

If I take out a 10 dollar loan to buy a haircut from you I haven't really created $10 dollars because I have a liability now that cancels out that money that I just conjured up.

[Pointedstick]

I understand the saving is deferred spending argument, but with a fixed money supply saving seems like it has to be a zero sum game.

But we don't have a fixed money supply. Not even close.

But every loan or credit is cancelled out by a debt or liability.

Which can be discharged, written off, etc. And in the case of federal government debt, it's just rolled over indefinitely until the dollar regime collapses, so it's not really debt at all; or rather, it's an extremely odd form of debt.

Also keep in mind that people save and spend different amounts during different parts of their lives. Young people just starting out are not going to be saving 50% of their income from day 1; they need to buy stuff for their lives, and if the economy pivots to mostly produce more expensive but higher quality stuff, then it may be a couple of years that their savings rate is only 10% or less. Same for someone old who's decided to spend everything down.

[Pointedstick]

If I take out a 10 dollar loan to buy a haircut from you I haven't really created $10 dollars because I have a liability now that cancels out that money that I just conjured up.

Sure, but if you pull out a gun and tell me to accept a $10 dollar bill that you just drew, and you promise to pay it back later, and you do, but with more hand-drawn dollars, then it's not the same thing at all. That's more like how things actually work.

[doodle]

But we don't have a fixed money supply. Not even close.

But every loan or credit is cancelled out by a debt or liability.

Which can be discharged, written off, etc. And in the case of federal government debt, it's just rolled over indefinitely until the dollar regime collapses, so it's not really debt at all; or rather, it's an extremely odd form of debt.

Also keep in mind that people save and spend different amounts during different parts of their lives. Young people just starting out are not going to be saving 50% of their income from day 1; they need to buy stuff for their lives, and if the economy pivots to mostly produce more expensive but higher quality stuff, then it may be a couple of years that their savings rate is only 10% or less. Same for someone old who's decided to spend everything down.

I think we are talking past one another....maybe lets clarify a few basics.

What would happen if every American decided to save 80% of their income? Would everyone's desire to save affect their ability to do so? Or is the paradox of thrift a myth?

[Pointedstick]

What would happen if every American decided to save 80% of their income? Would everyone's desire to save affect their ability to do so? Or is the paradox of thrift a myth?

The Paradox Of Thrift is an interesting thought exercise, and illustrates a point well, but to be true as applied in the real world, certain assumptions baked into the thought exercise would have to be present in reality, namely:
1. Fixed money supply
2. Fixed population
3. Uniformity of savings rate (e.g. people don't change their savings rates over time)

None of these things are true in the actual world we live in, and they invalidate the premise as applied to reality, IMHO. The money supply constantly grows. A person saving 50% may spend it all later in life. Demand is constantly expanded by population growth. And so on.

[doodle]

What would happen if every American decided to save 80% of their income? Would everyone's desire to save affect their ability to do so? Or is the paradox of thrift a myth?

The Paradox Of Thrift is an interesting thought exercise, and illustrates a point well, but to be true as applied in the real world, certain assumptions baked into the thought exercise would have to be present in reality, namely:
1. Fixed money supply
2. Fixed population
3. Uniformity of savings rate (e.g. people don't change their savings rates over time)

None of these things are true in the actual world we live in, and they invalidate the premise as applied to reality, IMHO. The money supply constantly grows. A person saving 50% may spend it all later in life. Demand is constantly expanded by population growth. And so on.

So are you saying that the paradox of thrift doesn't exist or can't exist? It seems possible that everyone could decide to jump on the MMM bandwagon and start saving 80% of their income....stop buying cars, stop going out for drinks and dinner etc. etc.... If that happened I along with everyone else in my city would lose our jobs and thus wouldn't be able to save anymore. So it seems that there is some connection between spending and saving? No?

[doodle]

This was written by Cullen Roche regarding paradox:

http://www.pragcap.com/the-end-game-of-keynesianism

2)  Regarding the “paradox of thrift” - Keynes simply understood that investment creates saving.  But saving does not necessarily finance investment.  Let’s say I spend $100 on a candy bar you sell to me and you save that income immediately.  Your saving is $100 if even for the briefest moment.  In other words, your saving (income not consumed) is $100.  If you then consume $50 on dinner then you dissave $50 via consumption.  But that dissaving becomes someone else’s saving immediately.  In other words, your saving does not increase aggregate saving because your spending is someone else’s saving.  But let’s say a firm invests (spending not consumed for future production) $100 in plants and equipment.    The firm has not dissaved.  The firm has invested.  In this case, the firm has $100 in plants and equipment and the seller has $100 in new income.  Indeed, it is often investment that creates saving.  Keynes understood that my income is someone else’s spending and that, in the aggregate, if we don’t spend then someone doesn’t have income.  Therefore, if someone decides to save more than he/she earns then someone else doesn’t generate that income. In the aggregate, if we all saved every dollar we earned then there would be no income in the economy and economic life would grind to a halt. More importantly, Keynes understood that investment creates saving and that investment is driven by businesses who see high demand for their goods and services.  Keynes didn’t just respect saving, he was, by definition, the ultimate promoter of it by being a proponent of investment.

[Pointedstick]

What would happen if every American decided to save 80% of their income? Would everyone's desire to save affect their ability to do so? Or is the paradox of thrift a myth?

The Paradox Of Thrift is an interesting thought exercise, and illustrates a point well, but to be true as applied in the real world, certain assumptions baked into the thought exercise would have to be present in reality, namely:
1. Fixed money supply
2. Fixed population
3. Uniformity of savings rate (e.g. people don't change their savings rates over time)

None of these things are true in the actual world we live in, and they invalidate the premise as applied to reality, IMHO. The money supply constantly grows. A person saving 50% may spend it all later in life. Demand is constantly expanded by population growth. And so on.

So are you saying that the paradox of thrift doesn't exist or can't exist?

Can exist, but doesn't presently. I mean, if it did, even the meager 5% savings that Americans did would represent a 5% drain on the economy, no?

It seems possible that everyone could decide to jump on the MMM bandwagon and start saving 80% of their income....stop buying cars, stop going out for drinks and dinner etc. etc.... If that happened I along with everyone else in my city would lose our jobs and thus wouldn't be able to save anymore. So it seems that there is some connection between spending and saving? No?

This does not even seem remotely possible to me. The psychological motivations and personality traits that go into an 80% savings rate are extremely uncommon. I'm not even there yet; I'm still at 69%.

Basically what I am saying is that yes, if everyone in your town all at once decided to only spend 20% of their income--and assuming your town is totally self-sufficient with no outside trade links--then yes, your town economy would crash. But not only is that completely of the realm of possibility, but you'd also have to stall population growth, cut trade links, and freeze your town money supply. Outside of the vacuum of an intellectual thought exercise, this kind of thing just doesn't happen.

[Pointedstick]

[/b][/u] In the aggregate, if we all saved every dollar we earned then there would be no income in the economy and economic life would grind to a halt.

This statement is clearly true, but just as clearly inapplicable, since there is a 0% chance that everyone will save every dollar they earn. It is also, as I pointed out before, a total vacuum. In a hypothetical crazy society where everyone has a 100% savings rate, income could come from the government.

[doodle]

So in other words, the paradox of thrift exists but doesn't manifest itself because of our profligate ways? But if the paradox of thrift could theoretically exist then that must mean that savings is a zero sum game.

[Pointedstick]

So in other words, the paradox of thrift exists but doesn't manifest itself because of our profligate ways? But if the paradox of thrift could theoretically exist then that must mean that savings is a zero sum game.

No. I reject that logic. That something could theoretically exist does not in any way imply that its theoretical conclusions are applicable to an environment that does not share any of the assumptions that make the theory applicable.