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2020-04-17 Economy

[ZERO] In response to a likely worldwide recession, governments have turned on full blast the fiscal and monetary spigots. A $2 trillion spending plan has just been approved in the USA, central banks are on a buying spree, and the $1200 stimulus payment is just helicopter money.

Since the government does not have a magical tree of plenty and can only redistribute from the left pocket to the right by taxing, borrowing, or printing money, how does this make any economic sense or make any country better off?

Government and Keynesian economists will tell you it’s to protect us from the coming dangers of hoarding; specifically, that banks will stop lending and just let funds sit. Keynes brought hoarding to the forefront of economics in his The General Theory of Employment, Interest, and Money; a concept that the classical economist considered to be irrelevant.

In a circular flow economy, the value of output must be equal to income. Income represents an ability to purchase goods and services and can be divided into three categories: it can be consumed, saved, or hoarded. Consumption is using income to obtain goods and services for current personal satisfaction. Savings is (correctly) defined as a transfer of purchasing power from one group to another.

The saver is giving up his current access to goods and services to be able to consume more of them in the future. These transfers allow investors to use these claims to purchase plants and equipment to produce goods and services in the future. The last category is hoarding, which in the Keynesian view is the equivalent of stuffing money in your mattress for a rainy day. It is the only claim on income that is not used to purchase currently produced goods and services.

This Keynesian nonsense about hoarding has been around for nearly a century and has led to some very bad economic decisions over the last eighty years. In reality, hoarding is just saving, and a simple example will show how the fear of hoarding is grossly overblown. Hoarding simply increases the value of dollars in circulation and is hardly anything to panic about.

Suppose there are ten pencils and only $10. Supply and demand will ensure that the price of each pencil will be $1 each. If the price of each pencil was $2, you could only afford to buy half of the pencils, and the unsold pencils would drive the price down. If the price was only 50 cents, then people would still have $5 looking for pencils to buy, driving their price up.

Now suppose that people hoard or stuff their mattresses with $2 and we only have $8 left to buy ten pencils. The price for each pencil will normally decline to eighty cents, putting us back in equilibrium. The Keynesian fear, though, is that prices are rather inflexible or adjust poorly, such that the price remains at $1 and we are left with two unsold pencils. There's not enough demand at the old prices. Keynesians advocate government spending to replace this lost demand.

Posted by Besoeker 2020-04-17 02:26|| || Front Page|| [11136 views ] Top

#1 I'll go on the limb here - because they don't save?

Posted by g(r)omgoru 2020-04-17 04:29|| 2020-04-17 04:29|| Front Page Top

#2 Neo-Keynesians demand the government maximise rent-seeking via stealthy ways.

They keep enough capitalism to skim from and progressive big government funding taxes on workers they can loot from and tax-cut outs for the ways they live.

Posted by Bright Pebbles 2020-04-17 05:12|| 2020-04-17 05:12|| Front Page Top

#3 But owning hard assets, especially real estate is eeeevil, right BP?

Posted by M. Murcek 2020-04-17 05:34|| 2020-04-17 05:34|| Front Page Top

#4 Because - mathematical model.

Posted by Bobby 2020-04-17 09:52|| 2020-04-17 09:52|| Front Page Top

#5 I'm sure there are thousands of examples of similar stories, but I will never forget a married young woman, husband didn't work and with a toddler son. She just couldn't wait to spend her income tax refund (a few thousand dollars) on a big-screen TV. That was her goal. To each his/her own, I suppose, but don't come crying to me or the State that you are down on your luck thanks to no fiscal discipline/profligate spending.

I hope this latest crisis makes many Americans reconsider their spending (charging?) habits. Earning $0.13 per year on your savings account isn't much of an incentive though.

Posted by Clem 2020-04-17 09:54|| 2020-04-17 09:54|| Front Page Top

#6 To the young lady, that income tax refund was her form of savings. She could easily have increased withholding at the beginning of the year to have a few dollars more to spend each month. But she did not, in order to have the lump sum at the end.

According to this article from 2019, so recent but from before the current excitement, the answer is more complicated than the excitable Zero Hedge writer would have us think.

Of the Americans who have savings accounts, the median balance of transactional accounts is $4,500. The average balance is $40,200. This is according to the Federal Reserve’s Survey of Consumer Finances, which is conducted every three years, most recently in 2016.

The Fed defines transactional accounts as checking, savings, money market and call accounts, as well as prepaid debit cards. Retirement and brokerage accounts, for instance, would not qualify as transactional accounts.

House equity is also not counted, though I seem to recall that for most Americans their house equity is the largest financial instrument in their portfolio.

Posted by trailing wife 2020-04-17 13:11|| 2020-04-17 13:11|| Front Page Top

#7 Why Americans Don't Have Any Savings

Because most of them never grew up in the 50's. See what the average citizen had back then and felt they were doing good. People saved to buy the next piece of furniture or basic appliance. We had home economics in schools for a reason. Credit was hard. Compared to today, that was poverty.

Posted by Procopius2k 2020-04-17 13:26|| 2020-04-17 13:26|| Front Page Top

#8 I remember when my dad was buying a new Pontiac back in 1969. The salesman asked him how he was going to finance it. There were a lot of things we wanted but he insisted on living within his means.

"Finance it?" he said. "I'm gonna pay for it all right now."

Posted by Abu Uluque 2020-04-17 14:14|| 2020-04-17 14:14|| Front Page Top

#9 Why save? Government is constantly devaluing your savings by printing money, so spend it while it still has value.

Posted by Glenmore 2020-04-17 15:59|| 2020-04-17 15:59|| Front Page Top

#10 It also doesn't help when time deposits & other interest bearing assets have been damn close to 0% for the past twelve years.

Posted by Raj 2020-04-17 17:18|| 2020-04-17 17:18|| Front Page Top

#11 According to this. only 15% of American household financial assets are in cash, other categories including credit, corporate and non-corporate equities, and whatever other comprises, claiming a total of $88 trillion shared among us. An interesting set of graphs.

Posted by trailing wife 2020-04-17 19:31|| 2020-04-17 19:31|| Front Page Top

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