From Warren Mosler's new book SEVEN DEADLY INNOCENT FRAUDS OF ECONOMIC POLICY
DEADLY INNOCENT FRAUD (DIF) #6
We need savings to provide the funds for investment.
DEADLY INNOCENT FRAUD (DIF) #6
We need savings to provide the funds for investment.
FACT:
Investment adds to savings
Second to last but not least, this innocent fraud undermines our entire economy, as it diverts real resources away from the real sectors to the financial sector, and results in real investment being directed in a manner totally divorced from public purpose. In fact, it’s my guess that this deadly innocent fraud might be draining over 20% annually from useful output and employment- a staggering statistic unmatched in human history. And it leads directly the type of financial crisis we’ve been going through.
It begins with what’s called the paradox of thrift in the economics text books, which goes something like this:
In our economy, spending must equal all income, including profits, for the output of the economy to get sold. (Think about that some to make sure you’ve got it before moving on.)
If anyone attempts to save by spending less than his income, at least one other person must make up for that by spending more than his own income, or the output of the economy won’t get sold.
Unsold output means excess inventories, and the low sales means production and employment cuts, and less total income. And that shortfall of income is equal to the amount not spent by the person trying to save.
Think of it as the person trying to save by not spending his income losing his job, and not getting any income, because his employer can’t sell all the output.
So the paradox is,
decisions to save by not spending income result in less income and no new net savings.
Likewise, decisions to spend more than one’s income by going into debt cause incomes to rise and can drive real investment and savings.
Consider this extreme example to make the point:
Supposed everyone ordered a new pluggable hybrid car from our domestic auto industry. Because the industry can’t currently produce that many cars, they would hire us, and borrow to pay us to first build the new factories to meet the new demand.
That means we’d all be working on new plant and equipment- capital goods- and getting paid. But there would not yet be anything to buy, so we would necessarily be ‘saving’ our money for the day the new cars roll off the new assembly lines.
The decision to spend in this case resulted in less spending and more savings. And funds spent on the production of capital goods, which constitute real investment, led to an equal amount of savings.
I like to say it this way-
‘Savings is the accounting record of investment’
Professor Basil Moore
I had this discussion with a Professor Basil Moore in 1996 at a conference in New Hampshire, and he asked if he could use that expression in a book he wanted to write. I’m pleased to report the book with that name has been published and I’ve heard it’s a good read. (I’m waiting for my autographed copy.)
Unfortunately, Congress, the media, and mainstream economists get this all wrong, and somehow conclude we need more savings so there will be funding for investment. What seems to make perfect sense at the micro level is again totally wrong at the macro level.
Just as loans create deposits, investment creates savings. So what do our leaders do in their infinite wisdom when investment falls usually, because of low spending?
They invariably decide ‘we need more savings so there will be more money for investment.’ (And I’ve never heard a single objection from any mainstream economist.) And to accomplish this Congress uses the tax structure to create tax advantaged savings incentives, such as pension funds, IRA’s, and all sorts of tax advantaged institutions that accumulate reserves on a tax deferred basis.
Predictably, all that these incentives do is remove aggregate demand (spending power). They function to keep us from spending our money to buy our output. This slows the economy and introduces the need for private sector credit expansion and public sector deficit spending just to get us back to even.
That’s why what seem to be enormous deficits turn out not to be as inflationary as they otherwise might be.
In fact the deficits are necessary to offset these
Congressionally engineered ‘demand leakages’ caused by the tax advantaged savings vehicles.
Ironically, the same Congressmen pushing the tax advantaged savings programs, we need more savings to have money for investment, are the ones categorically opposed to federal deficit spending.
But it gets even worse. The massive pools of funds (created by the deadly innocent fraud that savings are needed for investment) also need to be managed, and for the further purpose of compounding the monetary savings for the beneficiaries.
This is the support base of the dreaded financial sector- thousands of pension fund managers whipping around vast sums of dollars, which are largely subject to government regulation. For the most part that means investing in publicly traded stocks, rated bonds, and with some diversification to other strategies such as hedge funds and passive commodity strategies. And feeding on these ‘bloated whales’ are the inevitable sharks- the thousands of financial professionals in the brokerage, banking, and financial management industries. But that’s another story...
