In the real world savings are of three broad types:
Cash, which as we know is usually held in a bank, where they might provide a form of risk capital to the bank itself but where the sums deposited are never used to fund loans to bank customers, because that is a technical impossibility. So, this form of saving never boosts investment.
In second hand assets. This is where pension funds and most marketed savings schemes place their money.They buy second-hand shares in companies or they buy second-hand properties. They might also buy some corporate bonds, but not necessarily new ones. In that case this form of saving provides liquidity to the financial markets, and a big opportunity for them to take a rake off from dealing fees, but it provides precisely no new money at all for investment.
Third, there is saving used to fund actual investment. There is remarkable little of this. That is partly because actual investment in the UK is low, bit also because the vast majority of what investment actually takes place is funded by loans from banks, which term I use to embrace both commercial and investment banks. And, as previously noted, they do not need savings to fund this investment.
Banks don’t need deposits. Amd people in retirement do not need to be able to sell their assets to fund their retirement.
Think on that second, just for a moment. How much would you need to save if you were going to run your retitement only on the income from your assets, rather than eating the assets themselves? In a 5% world you’d need £1 million in savings to have a £50k pension. You’d have to save 70% of median household income for an entire working lifetime of 40 years to save that much. Or, for a 25k pension 35%.
Man’s a complete loon.
My savings will be deployed in my interest. The money isn’t his to use. However in contradiction to this a large amount has been ‘invested’ on my behalf in HS2, effectively using borrowed money and devolving the debt onto me and probably you and also Richard Murphy. Kinda magic money invested in a wet dream. Any investment I might choose to make would be in some rapacious capitalist with the aim of making money, not buying a train set.
“They buy second-hand shares in companies … but it provides precisely no new money at all for investment”
Except it does. The third group invests in start-ups, then once they’re established sells them to the more cautious second group, and reinvests the money in new start-ups. They wouldn’t invest anything like so much in higher-risk start-ups if there wasn’t an exit route.
“the vast majority of what investment actually takes place is funded by loans from banks … they do not need savings to fund this investment”
I’m not a banking expert, but this is bollocks isn’t it? At least in the quantity sense – the amount banks could lend on their own capital would be a tiny fraction of what they can lend with the wider base of customers’ deposits?
You can only get the velocity of circulation up so high before the bank starts going bust, so to make more loans you need more capital base – is that right?
Is there something simple we can link to when people say this sort of crap?
If the Ladybird Book of Banking doesn’t already exist, it needs to!
(Anything more advanced would be too hard for the people spouting this sort of crap)
https://timworstall.substack.com/p/no-really-mmt-is-wrong-about-banking
https://timworstall.substack.com/p/no-really-mmt-is-wrong-about-banking
He’s off on the disparaging “second hand shares” thing again so presumably he doesn’t own any. The entire stock market is nothing to do with investment apparently. Mental.
It’s meaningless anyway. It’ like knocking on the door of the Louvre and complaining they’ve bought second hand paintings.
In your sub stack link, oh wise one, you remark “Therefore the political impetus will always be to crank up the spending and not the taxation”
That’s one of two essential features of Keynesianism I don’t understand.
Ol’ Maynard was a clever chap and had heaps of experience of government and therefore of politicians. He should therefore have come up with a theory that declared “What a sage old buzzard I am.” Instead he came up with a theory that foolishly overlooks the point you made.
Vot explains? I’ve asked economists about Keynesianism a couple of times and their answers mainly persuaded me that they were none too bright.
Maynard thought he was wise enough to get politicians to wind it in at that point. Ho Hum.
Without doubt his best discovery was the winegum
It’s amazing (although not really) how he’s incapable of thinking things through.
The “second hand” securities market. If somebody’s buying them, somebody must be selling them. So they’re the ones getting the money. What are they doing with it? Ultimately it goes back into the economy. Paying for goods & services that other people are producing. Thus sustaining/creating employment. And on the commerce there are taxes. And he can’t think about a tax without going damp in the gusset. Or is he now against taxation?
But I’ve said this before. I don’t think he actually understands money. The value creating process that underlies it. His book-keepering mind can only see numbers on a spreadsheet & not what they represent.
I have a feeling that back when he was interning at whatever Big 8 firm it was that didn’t hire him, he was the guy on the audit team that was sent off by the in-charge to find so-and-so who worked for the company being audited and tell them he was sent to count the Retained Earnings drawer.
I thouight I saw him say somewhere that he articled at KPMG – maybe PMM, when it was still PMM? In any event, yes Dennis – he would have been the guy who was only there to sharpen the pencils and get tea / coffee for the ones doing the real work (to the extent auditing is “real work,” of course).
Breaking news: Biden not running – endorses Kameltoe. “She’ll make a great President” says chairman of Democrats Abroad UK. I’m getting in popcorn supplies while there’s still some left.
@dearieme
Maybe it’s because I’m at heart a trader & think like a trader I don’t find all this very hard to understand. Any trader is aware that any transaction must must have a counterparty. Every buyer needs a seller.
It’s the same with commerce. Every consumer requires a producer. And vice versa. And there is nothing else in any economy but commerce, is there? We are are all consumers or producers. Producers produce added value. Consumers consume it. In reality of course, we are all both producers & consumers. If you work for someone you produce added value for them & your pay will be part of that added value. All production is ultimately consumed in some way or other. And all tokens of value must be redeemed.
Commerce is expedited with money. To represent the tokens of value. As the value being produced by the producers travels to the consumer, the tokens of value must going in the other direction. So the total of the tokens of value in the economy must be equal total of value in the economy. Can’t be anything else.
So basically you can ignore the rest of economics. All it’s about is who in particular is currently in possession of the tokens of value. When economists like Keynes fuck around with the money supply, they’re changing who’s currently in possession of the tokens of value & thus the incentives. All taxation does is shift consumption from group of people to another & again change incentives.
So “investments” – which are, after all just tokens of value – have to be someone’s consumption.
You see how you don’t need money to explain what’s happening. For convenience sake we use money as a marker of the tokens of value. But they’re not the same thing. The second is real, the first a convenient fiction. It doesn’t matter what extravaganzas of book-keeping of money you do, the underlying tokens of value must end up with someone.
So if you want to understand Keynes, try & work who was going to benefit from the allocation of tokens of value for consumption & what that was supposed to achieve? Does that incentivise production in a particular part of the economy & why is that a benefit?
“Maybe it’s because I’m at heart a trader & think like a trader I don’t find all this very hard to understand. Any trader is aware that any transaction must must have a counterparty. Every buyer needs a seller.
It’s the same with commerce. Every consumer requires a producer. And vice versa. And there is nothing else in any economy but commerce, is there? We are are all consumers or producers. Producers produce added value. Consumers consume it. In reality of course, we are all both producers & consumers. If you work for someone you produce added value for them & your pay will be part of that added value. All production is ultimately consumed in some way or other. And all tokens of value must be redeemed.“ etc etc
All fine and dandy but doesn’t cover interest on the tokens which therefore requires the constant creation of new tokens while at the same time devaluing them.