4 ms·

You're running into a textbook case of the Fallacy of Composition. The essence is that the economy is full of feedback cycles. Your savings and spending decisi

You're running into a textbook case of the Fallacy of Composition. The essence is that the economy is full of feedback cycles. Your savings and spending decisions affect the size of the economy. Now, from an individual household perspective, your spending is only a drop in the bucket. It is small compared to the size of the economy, and it is small compared to the revenue of any individual firm. Any feedback effect your behavior may have is a rounding error compared to the sum of the effects of everybody else's behaviours. Therefore, it is reasonable to disregard the feedback effects when you make individual decisions. However, when you evaluate the economy as a whole, there is nobody else and the feedback effects are suddenly the dominant term. Disregarding those effects when making economy-wide policy decision is therefore a recipe for disaster.

msandford 13y ago
I'm not sure that the assumptions I've made are fallacious. I read the examples on the fallacy of composition and they are things like "if one runner runs faster they can win. so if all runners run faster, all can win" but I didn't say that. The original author made a very blanket, not at all specific statement about how "this leads to that" without any qualifications whatsoever. I have provided a specific counter-claim to that statement and asked for help reconciling. You can't just wave your hand and say "a whole economy is different than every other unit of organization in the world" just because. It's not as though my not spending money causes the economy to halt. The more I save the more bank deposits are available for banks to lend and spur further growth. This is one of the feedback cycles you've mentioned. This works at all scales so as anyone or everyone is not spending two things are happening in parallel: 1. bank deposits pile up which all things being equal will push the interest rate down 2. real resources (oil, steel, timber, etc) pile up or are not being actively consumed, thus making them available for use Then as the money loaned in 1 makes its way into the economy via loans, the real resources in 2 are readily available for those who secured the loans to make use of. I've just shown a situation where "deflation" leads to increased investment and growth rather than decreased. EDIT: If one person saves money, they can save money. Therefore if all people save money, all people can save money. That's the fallacy of composition I've supposedly made. There's a difference between "saving money" and "not spending any money at all, whatsoever" This is because even the most ardent saver would still have rent/mortgage, utilities, food, gas, insurance, clothing, etc. The necessities make up a large portion of what makes the world go 'round; nobody would stop eating for 6 months because they could buy twice as much bread in the summer for the same price. Furthermore bitcoin deflation isn't something that's guaranteed to happen forever, always no matter what. Many people are speculating in bitcoin right now the same way that investors speculate on a growing company, but that company's stock won't go up forever just because. At some point the exchange rate between bitcoin and the real economy will reach some kind of equilibrium and the price will level out.
- deleted 13y ago
  [deleted]
- nhaehnle 13y ago
  The more I save the more bank deposits are available for banks to lend and spur further growth. This is false, but it's an easy mistake to make because it's such a common misconception about how banking works. Banks do not lend out deposits in any possible interpretation of those words, and they do not require deposits prior to making loans. This is apparent because banks create deposits in the act of giving a loan. This doesn't mean that banks can just make loans willy-nilly. They do have to satisfy regulatory capital constraints. However, deposits are not capital. Still, by far the greatest determinant of loan-making is the credit-worthiness of potential borrowers. On this side, saving is a negative: It reduces the potential revenue of businesses, which makes those businesses less credit-worthy. There's a difference between "saving money" and "not spending any money at all, whatsoever" This is only a quantitative difference. If you think of the circular flow of money inside the economy, then any kind of saving represents a leak. If this leak is not balanced out by an in-flow of new money from loans, the circular flow will diminish. So you might be able to make a "one-time withdrawal" from that circular flow into your savings account, but in the long run, such withdrawals are not sustainable unless offset by somebody else. That much is clear. To summarize: If you successfully save at a greater rate for a longer period of time, then somebody else necessarily must save at a slower rate (or borrow at a greater rate).
  - msandford 13y ago
    > Banks do not lend out deposits in any possible interpretation of those words, and they do not require deposits prior to making loans. This is apparent because banks create deposits in the act of giving a loan. I know that the Fed is allowed to create money out of thin air, and I do understand that fractional reserve banking allows banks to pyramid loans. But ostensibly I can't start a bank today, deposit no money into it and tomorrow make a loan for $10mm. The money has to come from somewhere does it not? Or are you saying that's exactly how a bank works?

msandford 13y ago

I'm not sure that the assumptions I've made are fallacious. I read the examples on the fallacy of composition and they are things like "if one runner runs faster they can win. so if all runners run faster, all can win" but I didn't say that. The original author made a very blanket, not at all specific statement about how "this leads to that" without any qualifications whatsoever. I have provided a specific counter-claim to that statement and asked for help reconciling. You can't just wave your hand and say "a whole economy is different than every other unit of organization in the world" just because. It's not as though my not spending money causes the economy to halt. The more I save the more bank deposits are available for banks to lend and spur further growth. This is one of the feedback cycles you've mentioned. This works at all scales so as anyone or everyone is not spending two things are happening in parallel: 1. bank deposits pile up which all things being equal will push the interest rate down 2. real resources (oil, steel, timber, etc) pile up or are not being actively consumed, thus making them available for use Then as the money loaned in 1 makes its way into the economy via loans, the real resources in 2 are readily available for those who secured the loans to make use of. I've just shown a situation where "deflation" leads to increased investment and growth rather than decreased. EDIT: If one person saves money, they can save money. Therefore if all people save money, all people can save money. That's the fallacy of composition I've supposedly made. There's a difference between "saving money" and "not spending any money at all, whatsoever" This is because even the most ardent saver would still have rent/mortgage, utilities, food, gas, insurance, clothing, etc. The necessities make up a large portion of what makes the world go 'round; nobody would stop eating for 6 months because they could buy twice as much bread in the summer for the same price. Furthermore bitcoin deflation isn't something that's guaranteed to happen forever, always no matter what. Many people are speculating in bitcoin right now the same way that investors speculate on a growing company, but that company's stock won't go up forever just because. At some point the exchange rate between bitcoin and the real economy will reach some kind of equilibrium and the price will level out.

deleted 13y ago
[deleted]
nhaehnle 13y ago
The more I save the more bank deposits are available for banks to lend and spur further growth. This is false, but it's an easy mistake to make because it's such a common misconception about how banking works. Banks do not lend out deposits in any possible interpretation of those words, and they do not require deposits prior to making loans. This is apparent because banks create deposits in the act of giving a loan. This doesn't mean that banks can just make loans willy-nilly. They do have to satisfy regulatory capital constraints. However, deposits are not capital. Still, by far the greatest determinant of loan-making is the credit-worthiness of potential borrowers. On this side, saving is a negative: It reduces the potential revenue of businesses, which makes those businesses less credit-worthy. There's a difference between "saving money" and "not spending any money at all, whatsoever" This is only a quantitative difference. If you think of the circular flow of money inside the economy, then any kind of saving represents a leak. If this leak is not balanced out by an in-flow of new money from loans, the circular flow will diminish. So you might be able to make a "one-time withdrawal" from that circular flow into your savings account, but in the long run, such withdrawals are not sustainable unless offset by somebody else. That much is clear. To summarize: If you successfully save at a greater rate for a longer period of time, then somebody else necessarily must save at a slower rate (or borrow at a greater rate).
- msandford 13y ago
  > Banks do not lend out deposits in any possible interpretation of those words, and they do not require deposits prior to making loans. This is apparent because banks create deposits in the act of giving a loan. I know that the Fed is allowed to create money out of thin air, and I do understand that fractional reserve banking allows banks to pyramid loans. But ostensibly I can't start a bank today, deposit no money into it and tomorrow make a loan for $10mm. The money has to come from somewhere does it not? Or are you saying that's exactly how a bank works?