The Gaming Den

False. Utterly and completely false. The process by which money gets into the economy is incredibly complex, and people literally spend their entire careers studying it, and to think you can reduce a process that complicated to "bankz maek muney hurr" is nothing short of idiocy. Yes, banks extend credit, but they also obtain that money in the first place through a variety of means, ranging from other banks (via the interbank lending market), to private deposits, to bonds of various kinds. Governments issue fiat money and provide incentives to hold it through imposition of taxes, in addition to providing storehouses for money in the form of treasury bonds. Private citizens hold money and provide demand that allows for money circulation, and so on. I'm not even going to cover things like offshore accounts and hedge funds, as they just make everything even more complicated.

I think we're getting off-topic, however.

Just to nitpick a metaphor, I know, but broken windows take money out of insurance companies, who then recover it from society by jacking up collective "savings" rates on insurance policies.

If you keep breaking enough windows to overcome that, insurance companies stop covering them, and businesses have to raise the price of everything else to pay for them, which reduces trade in those other industries, cutting hours and putting other people out of work.

Ideally the businesses with savings spend those to replace the broken windows, but here in the real world we're in a recession so they don't, they bump prices, keep hoarding cash, laying off staff, and so on. It's the only way to survive in a recession, that or government largess.


Now, if government created a program to replace everyone's windows with triple-glazing, paid with deficit to counter every other bugger's savings, then you do create net employment and lower the future costs of doing business and staying warm in winter. Which eventually improves the ROI of the economy to the point people start unloading those savings again, because all their incomes are relatively higher.

Korgan0 wrote:False. Utterly and completely false.

no, it's true. banks give credit although they DO NOT have the money to actually back it up. that's why you're forced to have a bank account in the first place, because there is only a fraction of the whole pie in real money in circulation. why do you think there was a financial crisis and several banks in europe "had to be" saved with public money?

zugschef wrote:no, it's true. banks give credit although they DO NOT have the money to actually back it up. that's why you're forced to have a bank account in the first place, because there is only a fraction of the whole pie in real money in circulation. why do you think there was a financial crisis and several banks in europe "had to be" saved with public money?

I didn't realize TGD had such a large supply of economics experts. It's amazing that people on a web forum are able to speak so knowledgeably about such a complicated subject that takes decades of study.

If I missed your sarcasm, my apologies. If so, please disregard mine as well.

phlapjackage wrote:

zugschef wrote:no, it's true. banks give credit although they DO NOT have the money to actually back it up. that's why you're forced to have a bank account in the first place, because there is only a fraction of the whole pie in real money in circulation. why do you think there was a financial crisis and several banks in europe "had to be" saved with public money?

I didn't realize TGD had such a large supply of economics experts. It's amazing that people on a web forum are able to speak so knowledgeably about such a complicated subject that takes decades of study.

If I missed your sarcasm, my apologies. If so, please disregard mine as well.

if "decades of study" translates to losing billions speculating with public money then you're perfectly right.

and you don't need to be an expert to understand that banks had to lend money from their respective states because they couldn't refill their cash machines. banks are working with money that doesn't exist. if you don't believe me then why do you think that the us canceled their gold standard when de gaulle wanted to redeem gold with all the dollars france had?

Stubbazubba wrote:

FrankTrollman wrote: Incomes equal consumption. My spending is your income, your spending is my income. Counting incomes and spending together would be double counting, but more spending does mean higher incomes by definition.

Are savings just a negligible amount, then? I thought people saving or otherwise not spending had a non-insignificant effect on GDP, thus the entire need to induce consumption during recessions in the first place?

Everyone's income is, by definition, someone else's spending. Saving rates are real things, and because they are real things it is possible to have downward spirals of incomes. If I receive 2 dollars in income and only spend 1 dollar, then your income is only 1 dollar, and then there is only one dollar available for my income next paycheck (and that only if you spend your whole dollar). The reason we aren't constantly stuck in a downward spiral of poverty stemming from savings is because of two things:

• Monetary Velocity. I spend a dollar giving you 1$ of income, you spend a dollar giving Chad 1$ of income, Chad spends a dollar giving me 1$ of income. In a single year, three actual dollars of income/spending happen with only one literal dollar.
• Banks and mints are constantly pumping new dollars into the system. Either as "virtual dollars" in the form of tick marks in computers or as actual printed pieces of paper.

But yes, if the savings rate rises dramatically, then everyone's incomes have to fall by definition and the entire country is poorer.

-Username17

FrankTrollman wrote:Everyone's income is, by definition, someone else's spending. Saving rates are real things, and because they are real things it is possible to have downward spirals of incomes. If I receive 2 dollars in income and only spend 1 dollar, then your income is only 1 dollar, and then there is only one dollar available for my income next paycheck (and that only if you spend your whole dollar). The reason we aren't constantly stuck in a downward spiral of poverty stemming from savings is because of two things:

• Monetary Velocity. I spend a dollar giving you 1$ of income, you spend a dollar giving Chad 1$ of income, Chad spends a dollar giving me 1$ of income. In a single year, three actual dollars of income/spending happen with only one literal dollar.
• Banks and mints are constantly pumping new dollars into the system. Either as "virtual dollars" in the form of tick marks in computers or as actual printed pieces of paper.

But yes, if the savings rate rises dramatically, then everyone's incomes have to fall by definition and the entire country is poorer.

number one reason for the downward spiral of poverty is compounded interest.

[edit] http://www.youtube.com/watch?v=QPKKQnijnsM -- and that's it from me on that topic and thread hijacking.

Zug wrote:number one reason for the downward spiral of poverty is compounded interest.

That doesn't make any sense. Life without compound interest involves grinding poverty the likes of which you can't even comprehend. ISP is basically wrong about it being an especially good marker of the health of the economy to tally up capital savings, but he is correct that life without investment involves stagnant or falling productivity. The end result of such a scenario is actually mass starvation from simple Malthusian forces.

It is absolutely required that a certain amount of our society's wealth be sequestered into productive investments. Before compound interest, that basically did not happen. And the per-capita wealth looked like this:



To the extent that technological or infrastructural progress was made, it was swallowed by population growth. And Wealth was flat and everyone was poor for three hundred years. The normalization of compound interest in Britain at the beginning of the 17th century corresponds virtually exactly with the industrialization and escape from medieval poverty (and global conquest) that Great Britain achieved.

Mistakes were certainly made in the industrial revolution. But you aren't going to eliminate global poverty by turning back the clock to pre-industrial financial "systems".

-Username17

nevermind...

FrankTrollman wrote:

Investment per capita is even worse as a measure than GDP. First of all, there are as many or more ways to tweak the capital per person number without creating real wealth. And secondly, the amount of capital that people have is a measure of how much money society owes them in the future, not how much society is actually going to produce. We hope that the two even out, but they don't always. Capital ownership is not a measure of future productivity, it's a measurement of debt.

Example1: During the Soviet Union's Fifth Ruble period ...

Example2: During the housing bubble ...

-Username17

Ok I was unclear I guess. I am talking about capital as producer goods. The stuff that helps people produce more consumer goods, other than land and labor. If you grow your capital stock you can produce more stuff in a given unit of time, or you can produce stuff that was completely unavailable with shorter production processes.

I think you mean more like financial capital. Your examples are useful to show our different meanings.

5th Ruble Example - The government printed money. The country’s capital stock was the same as before, because just adding money does not add any new means of production. I do not believe this is good counterexample.

Housing bubble Example - A lot of resources were used to produce a lot of houses, yes. But houses themselves are durable _consumer_ goods. So “investing” in houses is not a case of increasing capital goods. Shifting a great number of resources towards consumer goods like houses _should_ be expected to reduce marginal productivity.

ISP wrote:Ok I was unclear I guess. I am talking about capital as producer goods. The stuff that helps people produce more consumer goods, other than land and labor. If you grow your capital stock you can produce more stuff in a given unit of time, or you can produce stuff that was completely unavailable with shorter production processes.

I think you mean more like financial capital. Your examples are useful to show our different meanings.

You're making a distinction that Capitalism does not make. There's a real distinction there, but Capitalism does not and cannot distinguish between an investment that yields returns because it is sucking wealth out of society and an investment that yields returns because it is increasing productivity. Indeed, the general assumption is that those types of investments are going to be chained together - that people will invest in ways that increase productivity because doing so will allow them to extract wealth from society and become personally better off.

Our society has gone badly off track by having a great deal of "capital" tied up into extremely ephemeral financial shenanigans that will not increase productivity. Our society and our tax code does not distinguish between investing in a factory and "investing" in Pogs or Magic cards. We treat spending money to upgrade farm equipment exactly the same as we treat spending money to bet on the price fluctuations of collectible stamps. And that's very damaging to our society.

But I also point out that your definitions are also badly messed up, just in a different way. Infrastructure and Education increase the productivity of our society, but they aren't "goods" in the way you're conceptualizing things. You actually can invest in both land and labor in a manner that makes society wealthier in a very measurable way. And that is also Capital, though not as you're attempting to define it.

But the bottom line is that even if we had a measurement that would tell us how much real wealth was being used to maintain and improve our future standards of living, it still wouldn't tell you that much about the overall health of the economy. The Soviet citizens of the 50s were investing a lot in improving infrastructure and they were being paid a lot of money, but the economy was badly out of whack and wasn't particularly healthy. To a first approximation, GDP per capita and Real GDP Growth per capita are actually pretty damn good (though obviously they can give you some erroneous results: see China).

-Username17