Why Americans Don't Have Any Savings

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.

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