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To say that savings is for suckers is to downplay the role that banks have played in making savings such a bad thing nowadays. Why save your money when you can

To say that savings is for suckers is to downplay the role that banks have played in making savings such a bad thing nowadays. Why save your money when you can invest in a mutual fund, right? Then the banks can trade away your money, misspend it, lose it, and get bailed out, while you're left with nothing to show for it. You hear all this noise about companies going bankrupt, people going broke, and living paycheck to paycheck. If financial regulations made saving a little more attractive, instead of encouraging everyone to channel their money (borrowed or not) into risky investments - or even investments that seem stable, but end up being part of some larger fraud - maybe we wouldn't be in as bad a mess as we've been through.

sokoloff 17y ago
A dramatically higher savings rate would likely be disastrous for the US economy. That is why financial regulations (I presume you meant to suggest tax policy or other government incentives rather than regulation directly). Why is that? If you double the savings rate, at a high level, money changes hands about half as often across the aggregate economy. Halving the aggregate amount of economic transactions would represent a huge missed opportunity for profits (by individuals and corporations) and taxation (profits for the government). Don't believe me? Imagine a savings rate of 10% (far higher than the US rate; far lower than the 1970s/1980s Japanese rate). Inject $10 into the system by A buying something from B. B now saves $1 of that and spends $9 with C. C now saves $0.90 and spends $8.10, etc, etc. Tracking that until the next spend is under $1, with a 10% savings rate, that $10 turns into $91 of total spending. Making the rate only 11% reduces the spending to $83. 15% is a disastrous $62. 20% is $47 in total spending. 5% is a stimulative $181 and 3% is the taxman's dream of $301.40. While I don't believe that the actual economy is so simply modelled, this "Fiscal multiplier" has more than a grain of truth to it, explains why "small" stimulus programs have a disproportionate effect on the economy (providing the savings rate stays low), and why the government is NOT incented to raise the savings rate substantially, assuming you think their goal is a steadily growing economy.
- Gormo 17y ago
  But doesn't a higher savings rate infuse money into credit markets? B's $1 in savings is at least $1 available for capital and consumer credit alike, and with fractional reserve rates, even more. Most of the boom that preceded the current bust was fueled by credit expansion - and the bust was largely due to poor risk assessment, not the high availability of credit itself.
  - sokoloff 17y ago
    I'm sure there is some need for balance, but from the (smallish) amount I recall of Macro in college, a small positive savings is the "optimum" for economic growth without unbounded inflation, etc. If the savings rate were negative, then availability of credit may be the overall bounding factor. In the situation the US finds itself currently, I believe that an increased savings rate will slow or stall the recovery. (That doesn't mean that I don't think individuals should be prudent and save, which I continue to do, but rather that I want OTHER people that I don't know or care about to continue to spend freely, ideally on products my company sells. :) )
- derobert 17y ago
  First, money put in a bank savings account is used by the bank to make loans. Its not put in a hole in the ground. Money put into bonds is spent by the issuer. Etc. Second, even if it did, the effect can be (and will be) counteracted by the Fed putting more money into circulation.

sokoloff 17y ago

A dramatically higher savings rate would likely be disastrous for the US economy. That is why financial regulations (I presume you meant to suggest tax policy or other government incentives rather than regulation directly). Why is that? If you double the savings rate, at a high level, money changes hands about half as often across the aggregate economy. Halving the aggregate amount of economic transactions would represent a huge missed opportunity for profits (by individuals and corporations) and taxation (profits for the government). Don't believe me? Imagine a savings rate of 10% (far higher than the US rate; far lower than the 1970s/1980s Japanese rate). Inject $10 into the system by A buying something from B. B now saves $1 of that and spends $9 with C. C now saves $0.90 and spends $8.10, etc, etc. Tracking that until the next spend is under $1, with a 10% savings rate, that $10 turns into $91 of total spending. Making the rate only 11% reduces the spending to $83. 15% is a disastrous $62. 20% is $47 in total spending. 5% is a stimulative $181 and 3% is the taxman's dream of $301.40. While I don't believe that the actual economy is so simply modelled, this "Fiscal multiplier" has more than a grain of truth to it, explains why "small" stimulus programs have a disproportionate effect on the economy (providing the savings rate stays low), and why the government is NOT incented to raise the savings rate substantially, assuming you think their goal is a steadily growing economy.

Gormo 17y ago
But doesn't a higher savings rate infuse money into credit markets? B's $1 in savings is at least $1 available for capital and consumer credit alike, and with fractional reserve rates, even more. Most of the boom that preceded the current bust was fueled by credit expansion - and the bust was largely due to poor risk assessment, not the high availability of credit itself.
- sokoloff 17y ago
  I'm sure there is some need for balance, but from the (smallish) amount I recall of Macro in college, a small positive savings is the "optimum" for economic growth without unbounded inflation, etc. If the savings rate were negative, then availability of credit may be the overall bounding factor. In the situation the US finds itself currently, I believe that an increased savings rate will slow or stall the recovery. (That doesn't mean that I don't think individuals should be prudent and save, which I continue to do, but rather that I want OTHER people that I don't know or care about to continue to spend freely, ideally on products my company sells. :) )
derobert 17y ago
First, money put in a bank savings account is used by the bank to make loans. Its not put in a hole in the ground. Money put into bonds is spent by the issuer. Etc. Second, even if it did, the effect can be (and will be) counteracted by the Fed putting more money into circulation.