Second order effects, second order effects

The more people save the less economic activity there is in the UK. That is for two reasons. The first is that savings take money out of the economy: they are not spent, so that has to be true. And second, because savings do not fund investment (they go into second-hand shares and property in the main, instead) they do not add value to the UK economy. They do instead simply inflate the value of financial assets.

Creating more investments which can then be transformed into those financial asserts now makes more money. Therefore more real investment will take place as a result of high financial asset prices.

He doesn’t even get the basics, does he?

There is good reason for this. Of course it makes sense for an individual to save. I do not dispute it. But as I say time and again on this blog: just because something makes sense for an individual does not mean it makes sense for an economy as a whole: in fact the opposite is often the case. And that is true here. So long as everyone does not save then saving for retirement can work because the assets into which money is saved are not overvalued enough, and the economic effect of saving in the current period is not big enough, for massive economic distortion to result. But is everyone does it then the opposite is true: total economic distortion results: asset bubbles are created whilst current incomes are suppressed and the result is an inevitable economic meltdown when it is appreciated that there will never be a market able to buy the assets that must (in the case of pensions) be sold to provide an income for a person in retirement. And I stress, pension calculations do assume that the capital is consumed and so assets must be sold.

That assets must be sold in order to fund pensions is a good reason to have markets in secondary investments, no? So they can be sold to fun pensions?

Haven’t we now just justified the existence of stock markets? And even just said that if we all invest in local authority bonds and direct investments in hospitals, then we’re still going to want a secondary market in them?

22 comments on “Second order effects, second order effects

  1. So long as everyone does not save then saving for retirement can work because the assets into which money is saved are not overvalued enough, and the economic effect of saving in the current period is not big enough, for massive economic distortion to result.

    I can’t even begin to work out what he is going on about here. If everyone doesn’t save then saving for retirement can work?

  2. Remember folks: today saving is bad and people must spend their money; tomorrow the Big Bad Bogeyman will be ‘excessive’ Consumption.

  3. I think he has just invented the concept of the liquidity trap. The fact that Keynes, Hicks, Krugman et al got there before him is irrelevant. He is single-handedly inventing economics. What he is doing with the other hand I will leave for other minds

  4. I think I am justified at calling Murphy a particularly fine example of gammon.

    A finer red-faced, amply-proportioned, middle-class, white-male specimen of porcine outrage it would be hard to find.

  5. I think he has just invented the concept of the liquidity trap. The fact that Keynes, Hicks, Krugman et al got there before him is irrelevant. He is single-handedly inventing economics.

    Hey, why not? He invented country-by-country reporting about 20 years after everyone else.

    I expect him to invent the jet propelled guided NAAFI any day now.

  6. ‘But as I say time and again on this blog: just because something makes sense for an individual does not mean it makes sense for an economy as a whole: in fact the opposite is often the case.’

    “All within the state, nothing outside the state, nothing against the state.”

  7. Financial prudence and excessive saving doesn’t seem to have done Germany any harm.

  8. “savings take money out of the economy: they are not spent, so that has to be true.”

    Corollary: Banks don’t spend or lend to people who do.

    That also “has to be true”.

  9. I mean where does one even begin to dissect this – it’s the rantings of a maniac. Apparently money saved is not spent anywhere. We are a nation of people shoving the money under the mattress. Additionally everything is self-contained. No foreigners can buy or sell assets in the UK. In a further act of cognitive dissonance, check this out: at one juncture

    ‘But, fifth, and most important there will then be fewer young people (demographic change is happening) ‘

    ‘Pensions are always provided by a younger generation being willing to forego part of their income to look after the elderly. That’s the only way it works. And that can only happen en masse through a state pension system. ‘

    So with fewer young people around are they to give up even more of their income to fund the pension system, especially with the number of pensioners likely to increase? WTF?

    The guy is a grade A moron and without question the most idiotic commentator (Sorry to those who cite Owen Jones even he would not have written a column this stupid) extant in Britain today – I am still simply struck dumb (almost as dumb as the Sage of Ely himself) at the sheer cretinousness of this post – if a GCSE student had written it I’d be taking him to the headmaster on the grounds he was being insolent. Absolutely unbelievable.

  10. There’s one thing he certainly never gets his head around. For every buyer there has to be a seller. So there must be as much money coming out of investment as going in.

  11. “The first is that savings take money out of the economy: they are not spent,”

    Does he think people who are saving put their money under the mattress?

    I don’t know about him, but my savings account loans that money out and at least provides a return roughly equal to inflation.

    So that money is being both saved and used at the same time.

  12. BiS

    That’s an excellent point re the secondary market. Where does he think the money “taken out of the economy” goes if it being handed to existing shareholders who are cashing out?

  13. My burning ears…. You are better than this. Murphy never thinks. Thinking is neo-liberal

  14. As usual, Murphy effectively finds himself at war with accounting identities.

  15. Pensions are always provided by a younger generation being willing to forego part of their income to look after the elderly. That’s the only way it works. And that can only happen en masse through a state pension system

    Err, tilt?

    No, that’s not the only way it works. And it doesn’t have to happen en masse through a state pension system. And in a state pension system (or compulsory private system) the willingness or otherwise of younger people is irrelevant.

    My (compulsory private and portable) pension provider here in CH just informed me that they’ve got 107% coverage. Which is nice. So it doesn’t have to run as a ponzi scheme, even if Spud simply can’t imagine anything other than a State run ponzi scheme.

  16. He’s really knocked it out of the park on this post. Are you sure he’s not trolling you?

    “So long as everyone does not save then saving for retirement can work” I can’t even…

  17. Ivor C – I think you’re overlooked the fact that as Germany doesn’t run a deficit, no one in Germany has any money.(See Murphy, Jone 2017).

    I think that’s right…

  18. The Potato hates pensioners – he’s posted various rants blaming pensioners and saving for pensions as somehow leading to the exploitation of the young. He’s also accused house owners of offshore tax evasion. The man’s an idiot who hates everybody who doesn’t agree with him. I’m hoping that this summer is exceptionally hot – so that the tuberous one get’s so agitated that he explodes.

  19. I wonder if we’re over-thinking Ritchie. All those words in his post… and all he really wants to say is he wants to nationalise pensions to have us forced in our later years into receiving whatever handouts he and his Courageous State decides we NEED. To justify this viciousness he dreams up shit like “savings take money out of the economy”.

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