The argument for austerity (Contains Math)

[william the wie]

Investment = Savings (This is an identity in economics just two different names for the same thing.)

Productivity = (Investment - [inventories, replacement of used up capital goods and write-offs of bad investments])/population.

Breakeven savings has a SWAG of about 6%. I suspect the actual number is higher but like the RDA minimums that you can get by with in terms of vitamins without greatly increasing your number of sick days it is minimum that prevents immediate harm. Going below 6% savings for decades caused a gutting of employment first in manufacturing, then in construction in 2007 and finance 2008-9.

Savings = Income - (Consumption, Taxes and Debt service [amortization as well as interest and liens upon collateral])

So we can continue in the race to the bottom to end up with Chinese wages and pollution by means of stimulus packages or we can go with austerity. Which way do you want to go?

 

[Whipp]

Investment = savings? ......for real? balancing economic equations doesnt make it so

what about the fact that a lot of investment lets say from investment banks doesnt come from the savings pool of owned assets they have at their dispoal but from other peoples debt promises instead. The fact that banks lend money that doesnt exist at that moment in time is exactly the heart of the problem

Your entire analysis is based on a logical but flawed assumption..which makes you a true econmist..work out how the banking system actually works

 

[midcan5]

"What is called sound economics is very often what mirrors the needs of the respectably affluent." J. K. Galbraith

Economists remind me of policemen, they both need the crime and the evidence to figure out the cause. Only two economists I have read seem to grasp the simple notion that economies don't operate in a laboratory, and include that fickle object called humans. Add to those items all the sometimes bizarre human traits. Keynes and Galbraith are the best out and can be read today as if they were talking about today and not the past.

http://membres.multimania.fr/yannickperez/site/Keynes la fin du laissez Faire.PDF
Richard Parker
http://www.nytimes.com/2010/05/07/books/07book.html?_r=1


"On the day when Saddam was caught, the bond market went up in the morning, and it went down in the afternoon. So here we had two headlines ? "Bond Market Up on Saddam News," and in the afternoon, "Bond Market Down on Saddam News" ? and then they had in both cases very convincing explanations of the moves. Basically if you can explain one thing and its opposite using the same data you don't have an explanation. It takes a lot of courage to keep silent." Nassim Nicholas Taleb


"Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone." John Maynard Keynes
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[pinqy]

Investment = Savings (This is an identity in economics just two different names for the same thing.)

It most certainly is not. Investment refers to money spent on Capital, and Savings refers to money not spent. Securities can be either Investment or Savings depending on accounting. Perhaps what you're confusing is that for National Accounts, Savings should equal Investment, though they usually don't. But that's accounting balance, not definitions.

Productivity = (Investment - [inventories, replacement of used up capital goods and write-offs of bad investments])/population.

I have never heard of anyone measuring productivity that way. The most commonly used measure of productivity is Labor Productivity, but Multi-factor productivity is also calculated.

 

[loosecannon]

It most certainly is not. Investment refers to money spent on Capital, and Savings refers to money not spent.

That's exactly what I thought and that's the prime reason why I don't understand how econ growth is often stated to hinge on savings rates.

 

[pinqy]

It most certainly is not. Investment refers to money spent on Capital, and Savings refers to money not spent.

That's exactly what I thought and that's the prime reason why I don't understand how econ growth is often stated to hinge on savings rates.

Because too much savings (which is never defined) means money is not being spent, and money not being spent means no economic growth. GDP = C + I + G + NX So if Income is constant and Savings increase that means that C (consumption) and/or I (investment) must go down. Savings takes money out of the GDP equation.

 

[loosecannon]

That's an inverse effect. I commonly see people attribute positive econ growth with a high savings rate. Asia is frequently credited with such an effect.

But what difference does it make to the economy if investment capital comes from existing money saved in banks and lent by those banks or new money introduced into circulation for the same purpose?

 

[pinqy]

That's an inverse effect. I commonly see people attribute positive econ growth with a high savings rate. Asia is frequently credited with such an effect.

Opinions are varied. I remember in the 80's my econ classes said that Japan did so well because they had a higher savings rate, and then in the late 90's we were told Japan was doing poorly because they had a higher savings rate. (lots of people take 12 years to get their degree). Savings isn't good for growth, but it is good for sustainability

But what difference does it make to the economy if investment capital comes from existing money saved in banks and lent by those banks or new money introduced into circulation for the same purpose?

It doesn't (well, I'm sure it does, but I don't believe the difference to be of any great importance). But the investment capital coming from a bank is no longer savings, it's investment.

 

[william the wie]

Savings (real savings) is what real investments are made of. They are unused goods and services made available to create capital goods and services.

Money savings and investments are accounting devices.

Real economic returns comes in spurts of booms, bubbles, bumps and busts. Accounting returns smooth out the bumps and potholes so it is hopefully easier to make sense of what is happening. The difference is much like the threads about UE and UC: the official numbers never match observed reality. While this disconnect gets a lot of play in bad times in good times the laid off burger flipper hold out for a six figure income is not brought up as an overstatement of UE when U3 is under 4%.

While I may and do agree that Graham's Mr. Market is a multiple personality with manic-depressive and schizoid identities that it is what is. I will go further and agree with Soros that mistaking accounting conventions in the financial markets for reality causes all sorts of feedback problems into the real economy it is still the best accounting system yet developed.

 

[loosecannon]

You are talking about a % of productivity that is reinvested into more capacity. Once you discount non productive investment I would guess we are near an all time low since our founding.

But what exactly does that have to do with this:

So we can continue in the race to the bottom to end up with Chinese wages and pollution by means of stimulus packages or we can go with austerity. Which way do you want to go?

btw I think the answer is both. If we have revealed a fatal flaw in our modern finance economy it is that it stacks the incentives so that unproductive investment produces a higher ROI than traditional investments in added capacity. This happened big time in the 90's and changed peoples perspectives somewhat permanently.

But globalization also increased the incentives to invest in capacity abroad not here where we actually own it. What a waste.

 

[william the wie]

That's an inverse effect. I commonly see people attribute positive econ growth with a high savings rate. Asia is frequently credited with such an effect.

Opinions are varied. I remember in the 80's my econ classes said that Japan did so well because they had a higher savings rate, and then in the late 90's we were told Japan was doing poorly because they had a higher savings rate. (lots of people take 12 years to get their degree). Savings isn't good for growth, but it is good for sustainability

In the 80s the demographics of spending was largely unknown and even now it is poorly understood. Japan's population began to stagnate just prior to the start of the lost decades.

But what difference does it make to the economy if investment capital comes from existing money saved in banks and lent by those banks or new money introduced into circulation for the same purpose?

It doesn't (well, I'm sure it does, but I don't believe the difference to be of any great importance). But the investment capital coming from a bank is no longer savings, it's investment.

Soros and Buffet disagree with you on that last point.

 

[william the wie]

You are talking about a % of productivity that is reinvested into more capacity. Once you discount non productive investment I would guess we are near an all time low since our founding.

But what exactly does that have to do with this:

So we can continue in the race to the bottom to end up with Chinese wages and pollution by means of stimulus packages or we can go with austerity. Which way do you want to go?

btw I think the answer is both. If we have revealed a fatal flaw in our modern finance economy it is that it stacks the incentives so that unproductive investment produces a higher ROI than traditional investments in added capacity. This happened big time in the 90's and changed peoples perspectives somewhat permanently.

But globalization also increased the incentives to invest in capacity abroad not here where we actually own it. What a waste.

You are still thinking in terms of either monetary or physical capital whereas most capital is social and personal. For example the main thing that is holding up internet commerce is that there is no physical person to complain to when things go wrong either in person or on the phone. Social and personal capital is a huge component of GDP but no one knows how to account for it in a consistent fashion.

 

[Zander]

There is a reason they call economics the "dismal science"...it is depressing.

 

[william the wie]

There is a reason they call economics the "dismal science"...it is depressing.

So true. Behavioral, neuro and evolutionary economics are making it even more so not to mention age related spending models. Keynes with his newspaper beauty contest grossly underestimated the problem. Take the current downturn:

The current four generation demographic cycle model explains that Great Depressions must have some reason based on the roughly 88 year human breeding cycle. This is the Kondratiev wave theory.

Evolutionary economics can but doesn't explain the same Kondratiev cycle in a way that can be modeled. The 1960s popularizer Robert Audrey came out a predictive model called the Amity-Enmity complex that correctly predicted the outcomes of the seven day war and Nam in 1966 and this is the standard explanation. The way to an exploratory model is to work out perceived vs. expected vs. desired discounted genetic income.

Neuro economics can but doesn't explain the long cycle by means of the strengthening and weakening of neurological pathways by experience. (In large part this is due to inadequate baseline of data.)

Behavioral economics like neuro is still compiling data.

But macro-economists (generally) deny that there is a Kondratiev wave even while they are in one.

 

[loosecannon]

You are still thinking in terms of either monetary or physical capital whereas most capital is social and personal.

I actually wasn't, I was trying to ascertain your meanings

Social and personal capital is a huge component of GDP but no one knows how to account for it in a consistent fashion.

Or rather they don't want to.

 

[william the wie]

You are still thinking in terms of either monetary or physical capital whereas most capital is social and personal.

I actually wasn't, I was trying to ascertain your meanings

Social and personal capital is a huge component of GDP but no one knows how to account for it in a consistent fashion.

Or rather they don't want to.

Well it is kind of hard to get fMRI readings to determine what system is being activated when people are going about their daily business at least with current technology.

 

[loosecannon]

wtf does that mean?

 

[william the wie]

wtf does that mean?

You have to stick the subject's head in an MRI to tell which brain structures are activated by different activities. You know know those big damn machines that it is dangerous to have metal around an "f" in front means the subject can participate in different activities via a screen and non-electrical clicker. Anyhow money games and social games involving exchanges can be played with the subject to see how their brains react.