Tuesday, August 2, 2011

Watching a Keynesian Heart Attack

I take the mass aggregated, inflation adjusted, personal income number with a huge truck load of salt. This number is put out by the Commerce Department and requires the Department to estimate productivity, so that they get their inflation adjustment correct. How good are they at this?

I once again point to Alan Greenspan's note in his memoir that the Commerce Department and the Bureau of Labor Statistics both missed the productivity gains of the personal computer. That's no small miss.

Thus, I do take the personal income number very lightly. However, I note the alarm by MSM over the fact that the current release shows that personal consumption is down. This is total Keynesian panic, and nothing else. According to the release, personal income was up. So if you have personal income up and consumption down. It may mean individuals are hoarding more cash, but, more likley, it means individuals are saving more (in the sense of making more investments). Outside the Keynesian world, additional savings is a good thing. More savings, means more production, which means more consumer goods down the road for all of us.

Only a Keynesian would have a heart attack over a likely indication of more savings.


  1. I don't think you are considering the real rate of inflation (9%-10%), if you factor that in the real rate of spending is TANKING.

  2. So attractive the fallacy of conflating savings with cash hoarding can be that even some otherwise thoughtful Austrians have fallen for it.

    You've pointed out the confusions, I've tried to point out the confusions, and those I think are more than enough, but there are many more confusions that deserve attention. Here are some more...

    ONE: Those who conflate savings with cash hoarding cannot, by their own position, explain how the economy as a whole can accommodate an increase in "savings." While an individual can add to his cash balance by selling goods and services and then delaying his expenditures for long enough such that the fallacy believers conclude that he is "saving," it is not possible for the economy as a whole to do so, such that Keynes' macro theory becomes allegedly relevant and government as a separate entity from the market should increase its spending should the economy as a whole be holding more cash. One individual "saving" by cash hoarding requires other individuals to reduce their cash holding.

    Thus, if there is going to be an increase in savings in the economy as a whole, then the only way that "savings" can increase for all or some economic actors and not be offset by a decrease in "savings" elsewhere by other economic actors (other than an increase in the supply of money) is by a rise in savings that take the form of an increase in real assets. Therefore, we can say that because only investments can serve as savings for the economy as a whole, investments should be the only conception of true savings.

  3. TWO:

    The next confusion of conflating savings with cash hoarding is that it necessarily leads one to having to conclude that a reduction in the monetary value of what has been saved, is itself saving. Here's how. Suppose many people, or all people, tried to increase their cash balances. Doing so will reduce the monetary value of factories and land, inventories and machines, materials and tools, and stocks and bonds. For all these things would be put up for sale by the owners in relatively high quantities in the effort to increase cash balances. Similarly, potential buyers would start to reduce their monetary demand for these assets, because they would be attempting to retain cash. The net result is that the left hand side account of assets on company balance sheets would be reduced, which requires a reduction in the right hand side account of retained earnings, which is accumulated savings.

    Thus, as people try to "save" more, accumulated savings will actually decline. It should be bleedingly obvious then that cash hoarding cannot be saving, because cash hoarding leads to a reduction in the total of what has been saved. Not only that, but it should also be obvious that hoarding on a large scale has nothing to do with saving or the attempt to save more, and is not something that even originates with consumers the way Keynesians believe it originates. Cash hoarding on a large scale is really an attempt by business owners to reduce their accumulated savings, and increasing their cash, in order to become more liquid.

  4. THREE:

    One last confusion I will mention that is generated by conflating savings with cash hoarding is the hostility towards cash hoarding, and the incessant calls for inflation and government deficits. By believing that large scale "saving" in the form of cash hoarding originates with the consumers, it leads to the confusion that what is not consumed simply "leaks out" of the economy's spending stream entirely. Keynes was led to this confusion as he fallaciously argued that a decline in the "marginal propensity to consume" puts a damper on the economy's ability to grow because it leads to less profitable investment, especially when the economy is in a "liquidity trap." It also leads to yahoos in the media and even in some schools to advocate that taxes be raised on the wealthy, and the loot given to the middle class and poor, on the basis that the middle class and the poor will "spend" more of their money on consumption, instead of "saving" it, i.e. "cash hoarding" like the wealthy misers, on the basis that money not spent on consumption is going to be hoarded.

    These confusions are exactly why attempts by economic actors to increase their liquidity are constantly frustrated by the central bank inflating the money supply so that "spending" rises once more, and by the government enacting wage controls, which leads to widespread unemployment, and by enforcing fractional reserve banking, which leads bank failures and a reduction in the supply of money. If people could hoard cash and their actions are not counter-acted by the misguided state, then at some point, once and for all, the degree of liquidity will become high enough that there would be no further basis for any reduction in subsequent spending. Wages and prices would stop falling, and the ratio between the stock of money and the monetary value of assets as well as spending for labor and goods/services would settle at a higher ratio. From that point on, individual economic actors would be easily accommodate future drops in earnings, as the risks of loss would be absorbed by one's cash hoarding.

  5. Umm, Major, i'm sure you have a valid point but really I can't figure out what that is. Actually I think you are just making up definitions and imagining peoples motives for doing stuff.