Thursday, July 2, 2009

The Convoluted Calculation of Savings

The Commerce Department has released the latest savings numbers. They show that savings have jumped to 6.9% of income. I suspect that part (if not most) of this increase is really a greater demand by individuals and corporations (and banks) to hold cash, rather than an increase in savings. But, it doesn't appear that Commerce computers understand "increased demand to hold cash," som it is being recorded as an increase in savings.

NyPo's Crudele touches on this point in his column today.

Although he doesn't use the term "increased demand to hold cash."--which means money that is really not out in the economy bidding up consumer or capital goods, you can get a good sense from Crudele's column how the Commerce computers have gone wacky: can the Commerce Department claim that the personal savings rate for
Americans jumped to 6.9 percent in May? ...

Here's the answer. After Washington claimed the savings rate hit 5 percent in January, I made a call to the Commerce Department.

I thought the figure was astounding since there is a recession and the 5 percent figure was the most money Americans had put into savings in 13 years.

First, an expert on the savings rate at Commerce warned me that these figures are the very first estimates and are the ones most subject to revisions. He said that people shouldn't take these preliminary numbers very seriously. But there was something even more intriguing. What seemed to be happening, this source explained, was a convoluted calculation of savings.

Here's how the thinking went: The US Treasury was receiving much less income tax revenue, which of course was understandable because we are in a bad recession. But the Commerce Department's computers were probably interpreting this, he said, to mean that Americans had more money in their pockets.

Since the computers believed people still had the money (because Treasury didn't have it) and since they are not spending that money, it must mean Americans are saving more.

I know it's stupid logic. The more reasonable explanation, of course, is that the money isn't going to the Treasury because people simply aren't earning as much.

Under this scenario, a penny not earned is a penny that can't be saved. So relax if you aren't saving 6.9 percent of your pay. Neither is anyone else

Crudele's explanation is almost there. But, the key point is that the money hasn't disappeared. The Commerce person that told Crudele that the computers are thinking Americans "have more money in their pockets" is actually mis-speaking. Money "in your pocket" is not savings, it is a demand for cash, likewise excess bank reserves (which have gone through the roof) that are held by banks are also funds that are a demand to hold cash. Neither is "savings" in the technical sense of money out in the economy bidding up capital goods. It's sitting, not bidding up anything. This is not "savings", but money held "as a demand to hold cash". Commerce computers just don't get it.


  1. Wenzel,

    Sorry, I was just reading this in Rothbard's MES and blogged on the topic as well but I seem to be confused now... how is "demand to hold cash" not synonymous with "savings"?

    I guess I don't understand how one could save without demanding to hold cash, at least in a money economy.

    I think Rothbard had pointed out that all money is either being spent or saved (demand to hold cash, in anticipation of being spent at a later date) and that even more technically, short of the nearly instantaneous speed of exchange of goods for cash, all money is being held by someone at some point in time so in a sense all money is being "saved" in someone's pocket prior to and following the moment of exchange.

    Maybe I am misinterpreting you or Rothbard or I am otherwise unclear on this. Can you clarify for me?

  2. Demand to hold cash is money you have in your wallet, under your mattress etc.

    Savings is money you put into a capital project, into a bank that loans it out, etc.

  3. Wenzel,

    Wouldnt the latter thing you described be an investment? An investment is a productive expenditure of money/resources. I understood savings to be money or resources that have been withheld from exchange/investment in anticipation of being put to use in exchange (consumptive expenditure) or investment (productive expenditure) in the future.

    The reason I would think that the capital project thing is no longer savings is because you have assumed a risk of loss in a project like that, whereas when it is "money under the mattress" you have not assumed a risk of loss.

    I might have to look this up real quick but am I making sense?

  4. Not everyone will agree with me on this, but I don't see any difference between saving and investmnet. To me the words are synonymous.

  5. Wenzel,

    I hope you don't feel like I am being a pest, I'd just like to improve my understanding.

    In a sense, I agree with you. However, in another sense I don't (about savings = investment).

    I was just looking through MES and if you look at pages 54 and 69, Rothbard gives two different examples of savings. On the first page, he seems to define savings as a withholding from consumption. But in the second example, he further breaks down the concept of savings into "plain savings" and "capitalist savings" but also advises that he will explain that all savings ultimately is "capitalist savings" which I think would be your idea of investment.

    I read this section of the book about a month or two ago as I am further into the book now, so my memory isn't fresh. I will try to read further into the surrounding pages for his clarification. But one reason I am concerned about "savings = investment" is that it has a Keynesian ring to it, with the "accounting identity" of the Keynesian production function essentially equating S and I. But I think in a way this violates Aristotle's "A is A" to say that all money/resources being saved are necessarily being invested, as well. Not thinking this through too deeply, if I set aside 300 dollars as savings, those 300 dollars are available to me to consume or invest however I'd like. Whereas, if I deploy the 300 dollars into a specific investment project, I no longer am "saving" those 300 dollars because I can not then go spend them on some other consumption or investment project.

    Are you defining savings as investment in the context of our loaned out economy, where any money stored in banks is loaned out and presumably invested (though I would ask the term "investment" to be further defined, as loaning out savings for someone to buy a car is not an investment by that car-buyer, though it is presumably an investment on the part of the bank if they're going to earn interest). Or are you applying this definition to economies and economic acts of savings/investment in general as a catch-all?

    Rothbard also explains "demand to hold" on pg. 137 of MES. Does this action and his concept of all demand being "demand to hold" by one person or another gel with your understanding that "savings is investment"?

  6. @Taylor

    Good questions. I am putting a full post together on it now.