The argument for austerity (Contains Math)

Discussion in 'Economy' started by william the wie, Dec 17, 2010.

  1. william the wie
    Offline

    william the wie Gold Member

    Joined:
    Nov 18, 2009
    Messages:
    7,298
    Thanks Received:
    675
    Trophy Points:
    175
    Ratings:
    +1,614
    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?
     
    • Thank You! Thank You! x 1
    Last edited: Dec 17, 2010
  2. Whipp
    Offline

    Whipp Rookie

    Joined:
    Dec 15, 2010
    Messages:
    7
    Thanks Received:
    3
    Trophy Points:
    1
    Ratings:
    +3
    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
     
  3. midcan5
    Offline

    midcan5 liberal / progressive

    Joined:
    Jun 4, 2007
    Messages:
    10,790
    Thanks Received:
    2,367
    Trophy Points:
    245
    Location:
    Philly, PA
    Ratings:
    +3,303
    "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
    >
     
    • Thank You! Thank You! x 1
  4. pinqy
    Online

    pinqy Gold Member

    Joined:
    Jun 8, 2009
    Messages:
    5,052
    Thanks Received:
    574
    Trophy Points:
    165
    Location:
    Northern Virginia
    Ratings:
    +1,009
    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.

    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.
     
  5. loosecannon
    Offline

    loosecannon Senior Member

    Joined:
    May 7, 2007
    Messages:
    4,888
    Thanks Received:
    263
    Trophy Points:
    48
    Ratings:
    +264
    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.
     
  6. pinqy
    Online

    pinqy Gold Member

    Joined:
    Jun 8, 2009
    Messages:
    5,052
    Thanks Received:
    574
    Trophy Points:
    165
    Location:
    Northern Virginia
    Ratings:
    +1,009
    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.
     
  7. loosecannon
    Offline

    loosecannon Senior Member

    Joined:
    May 7, 2007
    Messages:
    4,888
    Thanks Received:
    263
    Trophy Points:
    48
    Ratings:
    +264
    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?
     
  8. pinqy
    Online

    pinqy Gold Member

    Joined:
    Jun 8, 2009
    Messages:
    5,052
    Thanks Received:
    574
    Trophy Points:
    165
    Location:
    Northern Virginia
    Ratings:
    +1,009
    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

    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.
     
  9. william the wie
    Offline

    william the wie Gold Member

    Joined:
    Nov 18, 2009
    Messages:
    7,298
    Thanks Received:
    675
    Trophy Points:
    175
    Ratings:
    +1,614
    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.
     
    Last edited: Dec 17, 2010
  10. loosecannon
    Offline

    loosecannon Senior Member

    Joined:
    May 7, 2007
    Messages:
    4,888
    Thanks Received:
    263
    Trophy Points:
    48
    Ratings:
    +264
    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:

    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.
     

Share This Page