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Yeah, that's the consensus among most prominent economists and by extension politicians. It's based on the flawed assumption that consumption is automatically g

Yeah, that's the consensus among most prominent economists and by extension politicians. It's based on the flawed assumption that consumption is automatically good and savings is automatically bad. Saving money isn't just going scrooge mcduck and holding it in a vault. Saving money is investing it, which funds innovations and investments. That could be via stocks, bonds, bank deposits (which get loaned out), etc. I have yet to see a single compelling argument as to why an arbitrary 2% target is superior to say just a 0% target. Macroeconomics is basically a pseudo science anyways.

woodruffw 5y ago
> Saving money is investing it, which funds innovations and investments. That could be via stocks, bonds, bank deposits (which get loaned out), etc. I'm not an economist, but I think the Fed distinguishes between these activities: "saving" means holding money in accounts that are subject to the FDIC's reserve requirements, which in turn means that banks can't use (all of) that money for investments. "Investing" means circulating money in instruments that aren't generally subject to reserve or similar requirements, meaning that it's supplying liquidity to the larger market. I agree with your broader point about consumption (we really need to correct our infinite-growth mindset), but an economy that encourages excessive savings is about as bad long-term as one that encourages people to shove all of their money into the market.
- KyleBrandt 5y ago
  My current understanding is that the reserve rate is now 0% https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm , so it can all be loaned out.
  - woodruffw 5y ago
    Yeah. My operating assumption was that the 0% rate was an emergency maneuver by the Fed to increase liquidity at the very beginning of COVID, but it's not clear when (if at all) they plan on returning to a nonzero reserve rate. OTOH, the Fed has other mechanisms for encouraging bank reserves -- I believe they still pay interest on any excess reserves that banks hold at the end of each day. That rate (the "IOER rate") is (still) significantly higher[1] than the federal funds rate[2], so banks can essentially collect free money by keeping any reserves at all. [1]: https://fred.stlouisfed.org/series/IOER https://fred.stlouisfed.org/series/IOER [2]: https://fred.stlouisfed.org/series/FEDFUNDS https://fred.stlouisfed.org/series/FEDFUNDS
xapata 5y ago
Saving is investing only from the accounting perspective. In finance and economics we also care about how capital is invested, not merely that it is invested. What argument would you find compelling?
colinmhayes 5y ago
>I have yet to see a single compelling argument as to why an arbitrary 2% target is superior to say just a 0% target. Macroeconomics is basically a pseudo science anyways. Because deflation is horrible and inflation targets are just targets, it's impossible for the central bank to know exactly what will happen. If they target 0 there will be some years with deflation which destroys liquidity.
imtringued 5y ago
>It's based on the flawed assumption that consumption is automatically good and savings is automatically bad. There is no such assumption. We have interest rates that moderate the imbalance between saving and investing. Low interest rates indicate a lack of investments. If there were investments, companies would scoop up 0% interest loans until rates must rise again. If there were too many investments interest rates have to cut funding for the least worthwhile investments. >Saving money is investing it As I said above, the interest rates indicate otherwise. 0% interest rates only happen because people aren't investing the savings. >That could be via stocks, bonds, bank deposits (which get loaned out), etc. Those are not savings. >I have yet to see a single compelling argument as to why an arbitrary 2% target is superior to say just a 0% target. Because people age and die. Gold is just a shiny token representing an imagined ledger. If you have gold from 1000 years ago someone in 2021 owes you a debt. For the sake of the argument lets say the economy today was still the same as 1000 years ago. You decide to "save" your gold and spend it 1000 years later via a time machine. The person that owes you one ounce worth of work is long dead and he stayed unemployed for a month because of you. The physical asset that is represented by the ledger is gone but there are still workers alive in 2021. Even though they have nothing to do with the old dude 1000 years ago, they are the ones who owe you a debt now. It's absurd. One month of work was lost to unemployment but gold is supposed to keep its value by demanding one month of work from an unrelated person.

woodruffw 5y ago

> Saving money is investing it, which funds innovations and investments. That could be via stocks, bonds, bank deposits (which get loaned out), etc. I'm not an economist, but I think the Fed distinguishes between these activities: "saving" means holding money in accounts that are subject to the FDIC's reserve requirements, which in turn means that banks can't use (all of) that money for investments. "Investing" means circulating money in instruments that aren't generally subject to reserve or similar requirements, meaning that it's supplying liquidity to the larger market. I agree with your broader point about consumption (we really need to correct our infinite-growth mindset), but an economy that encourages excessive savings is about as bad long-term as one that encourages people to shove all of their money into the market.

KyleBrandt 5y ago
My current understanding is that the reserve rate is now 0% https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm , so it can all be loaned out.
- woodruffw 5y ago
  Yeah. My operating assumption was that the 0% rate was an emergency maneuver by the Fed to increase liquidity at the very beginning of COVID, but it's not clear when (if at all) they plan on returning to a nonzero reserve rate. OTOH, the Fed has other mechanisms for encouraging bank reserves -- I believe they still pay interest on any excess reserves that banks hold at the end of each day. That rate (the "IOER rate") is (still) significantly higher[1] than the federal funds rate[2], so banks can essentially collect free money by keeping any reserves at all. [1]: https://fred.stlouisfed.org/series/IOER https://fred.stlouisfed.org/series/IOER [2]: https://fred.stlouisfed.org/series/FEDFUNDS https://fred.stlouisfed.org/series/FEDFUNDS

xapata 5y ago

Saving is investing only from the accounting perspective. In finance and economics we also care about how capital is invested, not merely that it is invested. What argument would you find compelling?

colinmhayes 5y ago

>I have yet to see a single compelling argument as to why an arbitrary 2% target is superior to say just a 0% target. Macroeconomics is basically a pseudo science anyways. Because deflation is horrible and inflation targets are just targets, it's impossible for the central bank to know exactly what will happen. If they target 0 there will be some years with deflation which destroys liquidity.

imtringued 5y ago

>It's based on the flawed assumption that consumption is automatically good and savings is automatically bad. There is no such assumption. We have interest rates that moderate the imbalance between saving and investing. Low interest rates indicate a lack of investments. If there were investments, companies would scoop up 0% interest loans until rates must rise again. If there were too many investments interest rates have to cut funding for the least worthwhile investments. >Saving money is investing it As I said above, the interest rates indicate otherwise. 0% interest rates only happen because people aren't investing the savings. >That could be via stocks, bonds, bank deposits (which get loaned out), etc. Those are not savings. >I have yet to see a single compelling argument as to why an arbitrary 2% target is superior to say just a 0% target. Because people age and die. Gold is just a shiny token representing an imagined ledger. If you have gold from 1000 years ago someone in 2021 owes you a debt. For the sake of the argument lets say the economy today was still the same as 1000 years ago. You decide to "save" your gold and spend it 1000 years later via a time machine. The person that owes you one ounce worth of work is long dead and he stayed unemployed for a month because of you. The physical asset that is represented by the ledger is gone but there are still workers alive in 2021. Even though they have nothing to do with the old dude 1000 years ago, they are the ones who owe you a debt now. It's absurd. One month of work was lost to unemployment but gold is supposed to keep its value by demanding one month of work from an unrelated person.