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>And most economic theory says that the more people spend money the healthier the economy becomes Doesn't that seem like a bizarre theory since the economy is

• endersshadow 15y ago
  The more people spend money that they have. Debt-financed spending means that future money is not going toward goods and services. Investment is a good thing to have, too: GDP = Consumption + Gross Investment + Government Spending + Trade Surplus/Deficit Paying back of credit card debt (at least principal) doesn't fall into this equation. The interest falls into the Consumption category (paying for a service). That's why consumer debt adversely hurts GDP when out of control.
  • sirclueless 15y ago
    > Debt-financed spending means that future money is not going towards goods and services. This is a major hole in my current understanding of economic theory. My gut reaction tells me that being in debt should be bad but if you think about it, it's really a good place to be. If the general monetary supply is inflationary, then money you owe is gradually losing value. Which is an excellent proposal for those in debt: do nothing and wait, and you will owe less material value. So when you say that "future money is not going towards goods and services" I am at least a little OK with that, because future money isn't worth as much as money today, in actual fact.
    • sethg 15y ago
      I can only borrow money (or sell stock in my company) if someone else is willing to save (or invest). A healthy economy requires a balance between borrowers and savers.
    • Game_Ender 15y ago
      Interest usually fixes that equation nicely. Typically inflation is 2-3% and right now the cheapest money you can get is around 4%. So even with inflation factored in holding onto your debt will cost you more then paying it off right away.
• dredmorbius 15y ago
  Money is a wealth transfer medium. If you're familiar with physics, think of exchange particles associated with forces. In biology, it's similar to blood. I'm not sure a transportation analog works but it might (I need to think about that). Money works when it is exchanged for goods and services. When money stops moving, the economy "stops". There isn't any exchange going on (or there's far less than before). Economic activity slows, employment slows, etc. Credit and leverage, done right, allow more work from a given initial money supply (technically, credit increases the money supply), but this is predicated on the borrower repaying the initial investment. Done wrong, credit is extended for activities which don't allow repayment, and not only can't the the interest be paid, but the initial principle is lost -- and the money supply contracts. Money is not wealth (value imbued in goods/services), but it can be (with a stable currency) a measure of wealth. If the amount of money in circulation is decreasing (or the real wealth of an economy is increasing relative to a fixed money supply, say, with a gold/silver standard), then the value of a given denomination of coinage increases. Hoarding coin/currency/money becomes a wealth-accruing activity, while facilitating economic activity (by spending money) largely loses wealth. Hence the problem with a highly deflationary currency. Economic theory says you want a currency whose value tends to be stable, or slightly inflationary, with time, in order to encourage spending rather than saving. Note that none of this addresses the underlying physical economy, resource limitations/depletion, or other criticisms of traditional orthodox economics (most of which are highly valid -- we live on a planet of limited resources and good planets are both hard to find and the commute is a real drag). Regarding your comments on savings: yes, there is a well-known "savings paradox" where individual incentives to save are opposed to the overall economic goals of growth. This is one of many such individual/group paradoxes, and is one of the principle reasons for laws (legal, moral, or otherwise). The 1971 book The Logic of Collective Action by Mancur Olson is one of the better illuminations of the concept: http://economics.about.com/cs/macroeconomics/a/logic_of_action.htm http://economics.about.com/cs/macroeconomics/a/logic_of_acti... There are numerous other conflicts and paradoxes within economic theory and reality. Free markets, where they exist, work quite well. They're rather more rare, I'm coming to believe, than is frequently thought, and many forces work to limit them (political, plutocratic, monopolistic, and others).
  • narkee 15y ago
• alenlpeacock 15y ago
  It isn't an argument about saving vs. spending, it's an argument about what, fundamentally, money is. Money is a temporary store of value. Imagine a world without it. How would commerce work? Via direct barter. Direct barter is inefficient, because you may have to engage in an entire chain of transactions in order to get the one good you are trying to obtain. That's money's purpose -- to make this more efficient. What Krugman is saying, and I think it's hard to dispute, is that a currency that incentivizes hoarding rather than transfer of temporary value is an extremely inefficient one, in terms of economic activity. And free markets hate inefficiency, right?
• trevelyan 15y ago
  Upvoted since genuine comments and questions should not be downvoted. The concept is known as the paradox of thrift: http://krugman.blogs.nytimes.com/2009/07/07/the-paradox-of-thrift-for-real/ http://krugman.blogs.nytimes.com/2009/07/07/the-paradox-of-t... The counterintuitive thing is that you would think that all savings flow back into the economy as investment so demand will always equals supply. This is an axiomatic assumption of classical economics (the idea is known as Say's Law) and is what people generally believed before Keynes basically demolished it.
  • stevenwagner 15y ago
    Demolished it how? All I have seen is that Keynes promotes printing of money and lots of government spending, and the people in power love this! Please enlighten us.
    • trevelyan 15y ago
      Say's Law implies that you can only have structural unemployment: the unemployment rate should never be above 4 percent for any real length of time. Even before the Great Depression this was obviously wrong, but no-one had a cogent explanation for why (see http://en.wikipedia.org/wiki/Kondratiev_wave http://en.wikipedia.org/wiki/Kondratiev_wave for an example of the sort of tortured logic people tried to use to explain the recurring bouts of prolonged mass unemployment). Keynes' General Theory was revolutionary because it attacked the foundations of the classical economics which were still taught but which clearly failed to describe the real world. His book outlined a number of reasons why economies don't stay in equilibrium: expectation changes, wage stickiness, the "animal spirits" of investors, etc.. You can take or leave his individual points (people have tried regressing them out), but at the end of the day he was a voice in the wilderness telling the world that deflation was bad at a time when conservative economists were advocating deflation as the solution (!!!). Secretary of the Treasury Andrew Mellon at the time was even saying the same sort of thing we hear from Austrians and Ron Paul today, that the solution to the Great Depression required the government to "liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate [and] purge the rottenness out of the system." This was actually monetary policy after 1928 and it only made things worse, tanking the economy and ultimately sparking a series of bank crises in 1931. Yet there is no explanation for how things could have gone so badly according to the classical economic theories which predate Keynes. Keynes' core insight was showing on a theoretical basis how economies can fall into suboptimal equilibria ("liquidity traps") characterized by high unemployment and deflation and fail to recover on their own. By the time Friedman made the remark that "we are all Keynesians now," he was pointing out that even Keynes' critics accepted his points as true by the 1970s, a time when the academic debate had shifted to whether fiscal policy (government spending) or monetary policy (interest rate manipulation) made for better policy. > Keynes promotes printing of money and lots of government spending This is the sort of thing you hear from people who haven't read him - Keynes did not champion indebtedness. The closest you will get is an allegory he presents in the General Theory of having the government bury money in mineshafts so the unemployed can dig them up. Republicans trumpet this example as absurd because they think Keynes is telling us to pay people to dig holes. In fact, Keynes knew the example was absurd and was using it to parody his critics. Replace the moneybags with gold and you have exactly what happens to deflationary economies on the gold standard: as the value of gold rises in relation to the currency, the economy devotes more resources to digging up gold until the money supply expands enough that deflation stops. It is not hard to see from this example that embracing deflation is about as silly paying someone to dig holes in the ground, and actually much worse given the enormous social costs of mass unemployment you have to suffer in the meantime.