date: Thu, Jul 2, 2009 at 11:30 AM
I was going to criticize your post on savings, but Firefox won't let me....Something like, "If I put $10 a week into a jar on my dresser, you're saying that's not saving?"
My answer to Murphy is that as a professional economist to call that "savings" is misleading. I get what a layman means by that, but a professional economist should never be so loose with such an important word.
Here's my case:
There are key words surrounding the science of economics that are imprecise. For example, the word, "inflation." To the general public it will mean rising prices. To some economists, it means an increase in money supply.
The best way to deal with this specific problem is to refer to "price inflation" when we are talking about increasing prices, and "monetary inflation" when we are referring to an increasing money supply.
This semantic clarity is an important aid in understanding what is going on in the economy. For example, one will see economists who refer to the period before the stock market crash of 1929 as a non-inflationary period, what they really mean is that there was no price inflation. There was a great deal of monetary inflation. By making clear the two separate concepts one can see what could and could not be a cause of the stock market crash and Great Depression.
Clearly, price inflation could not have caused the crash and Depression, since there wasn't any. Monetary inflation is a different story. The Fed was pumping money out and stopped just before the stock market crash, making Austrian Business Cycle Theory an attractive explanation for the crash and Depression.
But, for those, who merely talk about "inflation" without clarifying the kind of inflation, they are making it difficult to understand the true factors in play.
Another imprecise word in the field of economics is "savings". At times it is used to mean money put in a bank, which is then loaned out by a bank, At other times it is used to mean money simply held, say, in the form of cash. There are two specific and very different economic functions with these two forms of "savings," and it is as dangerous to confuse them as it is to confuse price inflation and monetary inflation by simply referring to inflation.
The confusion with the word "savings" thus means that the professional economist should never use this word the way the general public does. In the same manner that the professional economist should shy away from using the word "inflation" when he means "price inflation". He may know what the public means when they refer to "inflation", but to keep confusion out of deep theoretical thought, he shouldn't use the phrase, and, indeed, he should take every opportunity to explain to the lay person the difference.
Thus, while I know what Murphy means when he calls putting money into a jar "savings," I would never use the term that way. To me putting money into a jar, a wallet or under the bed is exhibiting a "demand for cash". It is not out in the market bidding up for goods, in any fashion.
Now, money put into a savings bank, is to me savings. That is, there is no money in the bank after I deposit it there. The money is loaned out to others, who presumably are borrowing the money to bid for goods and services.
Thus, there is great confusion if you call money put in a jar savings (money which is just sitting there) and, at the same time, call money which is put in a bank the same thing.(Where it is, decidedly not sitting there, but out bidding for good and services).
Thus, when the Commerce Department comes out with a report that savings are skyrocketing during a recessionary period, I know that what we are getting is some very muddled thinking about what is really going on.
The immediate gut reaction by many commentators is that this is a good thing, since savings afterall grows (another bad term) the economy. And indeed, in my sense of the word, where money is put into a bank and it is loaned out, particularly to the capital goods sector, it is indeed a step in the direction of advancing the economy.
However, if the "savings" is simply an increase in demand for cash that is not finding its way to the capital goods sector (I am not dealing with consumer loans here just to make my key point clearer) then it is not bidding up anything. In one sense, it has neutral impact on the advancement of an overall economy. In another sense, if the public in general has an increased demand for cash, it will cause a deflationary period (nothing wrong with this either) to adjust to the higher level of cash people want to hold relative to overall prices.
If we refer to both these separate economic phenomena as "savings", we will hopelessly confuse ourselves and the general public. They act on the economy in two very different ways. That's why I prefer to call the holding of cash, the "demand for cash." Since that's what it is.
And money put in a savings bank (commercial bank etc.), "savings."
Now some may try to argue that money put in a jar may be put there until enough is accumulated to be put into a savings bank. This really doesn't change any of the dynamics at all. Money put in a jar is still a demand for cash. In this particular case, since the demand for cash can be for any reason, it can be a demand for cash to eventually turn it into savings at a bank. Remember the cash in the jar is cash sitting there, once it hits the bank, it doesn't sit there any more, it is loaned out, bidding for goods and services, that's when it becomes savings, in my book.
You can certainly go about using a term in any sense you want, but for the preciseness by which an economist should use terms in his own field, using the terms "demand for cash" and "savings" in very precise ways, will eliminate a lot of confusion (and bad theory) in the long run.
(Note: When I refer to the demand for cash, I am also referring not only to cash, but checking account money, and for banks, excess reserves. This all gets even more complex in the world of fractional reserve banking, and I am not going to attempt to explain all the nuances in a blog post. Suffice to say that none of it would change the basic concept of the key difference in the "demand for cash" and "savings". )