Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why Americans Don't Have Any Savings

Economics / US Economy May 06, 2020 - 03:47 PM GMT

By: Frank_Hollenbeck


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.1 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.

Another Keynesian fear is that if input costs such as wages don’t adjust and the cost of each pencil is stuck at ninety cents when the price has fallen to eighty cents, then businesses will be selling at a loss, leading to reductions in output, bankruptcies, more hoarding, and a downward spiral in the economy. This is the Keynesian fear of deflation. Hence, for a Keynesian either output prices don’t adjust or if they do, input prices don’t adjust fast enough. Of course, this entire Keynesian nightmare scenario assumes that in a market economy both input and output prices adjust slowly or with a long lag. This scenario has not been shown to be true in the real world—unless, of course, governments interfere—and we then might as well assume a world with negative gravity and suggest a policy of large nets to catch people from flying into outer space. If we assume that the successful entrepreneurs are the ones who best forecast output prices and then bid for input prices, there is no real reason to believe that prices in a market economy won’t adjust quickly. There is no empirical evidence that prices are sticky when governments allow them to adjust. If you need a current example, just look at the recent steep dive in oil prices.

Although governments continue their war on cash for fear of hoarding, their real concern today is not individuals stuffing their mattresses, but bank lending. When you put money in your checking account, you are expressing a desire to store purchasing power: otherwise, you would have put this cash in a savings account or purchased a bond. You assume that this money is always there, but banks take this money and lend it to other individuals and businesses in a practice known as fractional reserve banking. This process creates money out of thin air when a bank credits a borrower’s account without debiting the same amount from someone else’s account. It converts your desire to hoard—i.e., save—into spending by someone else with newly created money.

The government fear is that a recession will increase bankruptcies, nonperforming loans, and induce banks to cut back on lending, or essentially allow the money in checking accounts to revert to its intended function as a store (or reserve) of purchasing power. The money supply will then contract, leading to the Keynesian nightmare scenarios described above. But this money contraction results not from hoarding, but from fractional reserve banking. It is this process which leads to swift contractions in the money supply when recessions strike. This problem would be mitigated by more real saving, including the type of saving that Keynesians call "hoarding." 

Frank Hollenbeck teaches finance and economics at the International University of Geneva. He has previously held positions as a Senior Economist at the State Department, Chief Economist at Caterpillar Overseas, and as an Associate Director of a Swiss private bank. See Frank Hollenbeck's article archives.

You can subscribe to future articles by Frank Hollenbeck via this RSS feed..

© 2020 Copyright Frank Hollenbeck - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in