Economically, Putting Money In The Bank Is Like Spending It, Only Better.

How can saving money be the same as spending it?  What? Do you think the banker just hides your savings in a big vault until you want it back?  In a normal and healthy economy your money would be put to use doing things like building stuff, or digging and exploring for new resources, or all sorts of things like that. It would in fact be working just as if you had spent it. What you are putting in the bank, you see, represents value: which is your work.  But rather than consume the fruits of your labor right away, you forego that satisfaction and save.  This means that the currency that represents something of value, your labor, is used for other enterprises.  Those other enterprises involve profits, of which you get a little, (interest) the banker gets a little, (interest) and the one who borrowed it gets a little. (profit)

Don’t be an economic moron. Take the time to watch this short video to understand how we are all much better off with a true banking system, and not just a spigot with a money printer at the other end.

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Hat tip:  Austrian Economics Addict

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11 Comments

Filed under Banking, Economic Science, Economics, Money

11 responses to “Economically, Putting Money In The Bank Is Like Spending It, Only Better.

  1. Good, simple teaching tool on economic truth.

  2. shoulderbug

    Perhaps there’s some value in collective savings, but I think it only applies in times of economic boom / prosperity, and not in times of financial crisis:-

    (1) People are saving much more than they are spending.

    (2) The cost of borrowing is almost negligible, thus encouraging entrepreneurs to borrow.

    (3) Entrepreneurs invest in ways to produce cheaper, better and faster. (Though there is no guarantee that the investment will even bear fruit.)

    (4) In the short term, there are bills and salaries to be paid. An entrepreneur may not be able to settle these liabilities as nobody is spending –> he is not earning.

    (5a) Companies cannot pay debts because they are not receiving money, resulting in … (4)

    (5b) Workers do not want to spend because they did not receive their pay / did not receive as much pay / are retrenched, resulting in … (1)

    And as the cycle goes on, more people get sacked, more companies go bust, more people get sacked etc etc and the whole world turns miserable.

  3. Point 1. Just curious where you get your data for this?
    Point 4. The point of the post was that saving does not equate to “not spending” (if I understand your point 4 correctly). In this day of fractional banking in fact, for every dollar saved, 9 are created. (which is bad)

    Did you watch the video?

    Also, the interest rates you speak of are artificial. I encourage you to take 7 minutes and watch this video:

    • shoulderbug

      On data: I didn’t get data from anywhere. It’s the Paradox of Thrift, a hypothetical discussion like the video. Unlike that video, however, I believe that saving in times of financial crisis creates a worse situation than spending.

      On fractional banking: Money created, but not /spent/. Yes, it might get invested, but investment in spare capacities to produce stuff which the /mass public/ (emphasis) does not need is NOT going to help pull a hypothetical economy out of recession.

      You also have to consider the number of /debts/ or /loans/ taken by businesses prior to the recession which CANNOT be repaid due to people not spending as much.

      If the Austrian economists get their way with public policy, what will happen is the downward spiral elaborated earlier.

      On the video: I’ve watched the video and did more research on Austrian economics. Any form of study which refers back to texts 20-30 years back must ring some wary-alarm. The texts are either outdated or, if it is useful, already incorporated into current work.

      “First, most economists at research universities focus their attention on recent work. Things written more than twenty or thirty years ago are usually assumed to be irrelevant, out-dated, or incorporated into more recent work. We rarely focus on something like the Mises book (written in 1949) for the same reason that physicists don’t read Newton in the original.” — Greg Mankiw

  4. Rejecting what has been learned in the past is a great way to ensure that the same things must be learned over and over. No progress there. We can see the result of universities rejecting past experience by the state of our economy.

    “The study of history is a powerful antidote to contemporary arrogance. It is humbling to discover how many of our glib assumptions, which seem to us novel and plausible, have been tested before, not once but many times and in innumerable guises; and discovered to be, at great human cost, wholly false.” Paul Johnson

    • shoulderbug

      Well, would you agree that the world has grown much more complex, much more interconnected and much more sensitive to interindustrial and intercountry shifts in the past 20-30 years?

      Note that I am not suggesting to /reject/ what has learned in the past. Rather, researchers in fields like economics have either (1) incorporated these ideas into their current models (i.e. “Learning from the past”), or (2) rejected these ideas in the context of the modern day world.

      This is why Austrian economists are considered “not mainstream” and shunned by people in the /forefront/ of economic thought.

      On the issue of Universities rejecting past experiences — which, by the way, is really a straw man — leading to our current state of the economy, that’s a prime case of cum hoc ergo propter hoc.

      • That’s kind of funny when you think about it. Here you are arguing against Austrian Economics based on Argumentum ad numerum…. and almost every president since FDR, has been keynesian-esque, and my argument that our economy reflects that fact is a correlation/causation fallacy.

        Also, you make this statement:

        Any form of study which refers back to texts 20-30 years back must ring some wary-alarm. The texts are either outdated or, if it is useful, already incorporated into current work.

        This is a prime case of argumentum contra antiquitatem.

        If I understand your argument, and perhaps I don’t, it is that people should not save more during down cycles because businesses, in order to stay in business, need for people to spend. When people stop spending, and save instead, businesses fail, which begins a domino effect. The fact that the money people save will be lent out and thus remain in circulation does nothing, or takes too long, to help the local business survive. Did I restate that properly?

        My argument against that argument remains the same. You stated in your first comment “(3) Entrepreneurs invest in ways to produce cheaper, better and faster.” When a company invests it spends. It may take advantage of low interest rates and modernize a facility. This requires workers who get paid. But investment involves much more than corporate modernization. It also involves many more things like home remodeling, new automobiles and houses, and much more. Saved money is simply not taken out of circulation. If I spend $100.00, or I put it in the bank where it not only instantly becomes $900.00 because of factional banking, then pooled, then used to build a house, in the end the money gets spent. Being a keynesian I would think that you would approve completely because it creates even more debt, which is the basis of our modern currency.

        Just a note here. When I started this blog I almost named it “Letters To My Sister”. That’s because she has always been grateful, as well as some others, for my ability to explain economics in simple terms. In the “Mission” above I state the purpose of this blog, which is to discuss economics. I am always glad to do this. I actually like to be challenged in my thinking, and think outside the box, and consider everything, even the words of those with whom I disagree. If I am mistaken, I welcome a well reasoned argument as to why. Wisdom and prudence demand that I recognize that I don’t know everything, and that perhaps someone will come by here who can teach me something. Learning has been really really good to me. I’ve been blogging for years, and believe me, it has happened. This blogosphere of ours is a great tool for learning. I am deeply indebted to it.

        All that said, I do not enjoy argument for argument’s sake. I don’t mind fallacious arguments because we all swerve into them from time to time. I try to be gracious, as far as those things go, look past them and grasp the point. That you claimed in the discussion that I made fallacious arguments makes me suspicious that you are here to argue. If this is true, I think you are at the wrong site. I concede. You win. But if you think you can show me how I am mistaken, by all means please do.

        So, if I restated your argument correctly, it was a reasonable argument, and I gave you a reasonable response as to why I disagree. If I didn’t restate your argument correctly, please try again to restate it yourself better, because, clearly, I’m not understanding it.

  5. shoulderbug

    I thank you for treating my comments seriously. I too joined the community for the purpose of accelerating my understanding of matters. To be honest, I have never done as much research about Austrian Economics as I have had for the past few days and it is truly educational. 🙂

    On the discussion at hand, I find one slight contention in your stating of my position: “The fact that the money people save will be lent out and thus remain in circulation does nothing, or takes too long, to help the local business survive.” — Note: the “fact”.

    The problem with this brand of Austrian Economics theory is that it assumes that savings somehow WILL be invested and WILL automatically become investment, i.e.:

    Savings = Investment

    Surely you do not believe the above is a logical axiom. I, for one, think it is not true on two basis:

    (1) ACCELERATOR EFFECT. When the GNP of an economy falls, it will damage business profits and sales, create business pessimism, /discouraging/ fixed investments.

    (2) ANIMAL SPIRIT, which is to say, human behaviour is driven by public sentiments and in a situation where there is much pessimism, are people and companies willing to borrow and take on more DEBT?

    Savings, in times of economic recession, lead to idle cash rather than invested money as the Austrian version of money have suggested.

    On the issue of Keynesian economics “failing” as “proven” by the reliance on Keynesian theories in Public Policy, one of two conclusions can be drawn:

    (1) That it failed.

    (2) That the stimulus is not enough.

    Neither of which proves that Austrian “solutions”, which is simply to do nothing and encourage more savings, would work better.

    • Re, “The fact”. I was making your argument. Do the words “the fact” misstate your position?

      Re your number (1), I don’t understand.
      Re (2), Yes… some. In a free market, they certainly would. Why would they not?

      Let me start by saying that in our current economy interest rates are artificial. They are controlled by a “central planner” so to speak. This is not Austrian.

      In the Austrian model higher interest rates mean more people save, because it is profitable, and less borrow. As more people save, however, an abundance of “idle” cash will drive down interest rates so more people will borrow, which drives them back up… and so on. This is Austrian.

      But if the “central planner” decides to lower interest rates on his own, then wipes out the concept of “idle cash” by printing up loan dollars as needed, whatever the market is then, it is not capitalistic, and it is not free–though that doesn’t stop anyone from blaming it on these things when their tinkering goes bad. When you throw into the whole mix political motivations that insure loans, and force loans, it gets even worse. It is tinkering that begets more tinkering, but at least you can’t accuse anyone of doing “nothing”. Fortunately for the central planner, his services will be needed again to “fix” his problems.

      I would challenge you to widen your horizons in your thinking. (I love the link you provided BTW, He simplifies, for the likes of myself, the thought processes of a would-be central planner. I will be spending a lot of time there.) There are literally millions of economic transactions that take place every hour. Each of these transactions in a free market collectively decide, through prices, the allocation of scarce resources.

      Everyone has their motivations. The insulated tenured “economists”, with all his degrees and theorizing, the politician looking down the road to his next election, the businessman eying his bottom line, and the young couple wanting to buy their first house, and on and on. It is simply impossible for the most intellectual among us to decipher interest rates, prices, what resources should be sent where, and so on; though, unfortunately for humanity, hubris tends to trump wisdom so man never seems to tire of trying.

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