Savings and the Financial System

7 Key excerpts on "Savings and the Financial System"

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  eBook - ePub

  The Failure of the "New Economics": An Analysis of the Keynesian Fallacies

  • Henry Hazlitt(Author)
  • 2016(Publication Date)
  • Golden Springs Publishing

    (Publisher)

  “This “saving” relates to units of money and is the sum of the differences between the money-incomes of individuals and their money-expenditure in current consumption; and “investment” relates to units of goods. The object of this chapter is to illustrate further the significance of the distinction between these two things.

  “Saving is the act of the individual consumer and consists in the negative act of refraining from spending the whole of his current income on consumption.

  “Investment, on the other hand, is the act of the entrepreneur whose function it is to make the decisions which determine the amount of the non-available output, and consists in the positive act of starting or maintaining some process of production or of withholding liquid goods. It is measured by the net addition to wealth whether in the form of fixed capital, working capital or liquid capital (I, 172).”

  It is significant that though Keynes here defines “saving” explicitly in terms of “units of money” and “investment” explicitly in terms of “units of goods,” he then surreptitiously (or absentmindedly) introduces the element of money in “investment” under the term “liquid capital.”

  Small wonder that he himself later found the whole thing “very confusing!” It may be pointed out here that in the General Theory Keynes constantly uses a word like “income” without specifying or distinguishing between real income and money income. This leads to constant confusion. And as we shall see, when we do distinguish constantly and clearly between real income and money income, such plausibility as the Keynesian theories may have begins to wear off. His “system” needs this ambiguity and confusion.

  3. Saving as the Villain

  It will be noticed, also, that in the very terms of his definitions in the Treatise on Money , Keynes manages to disparage saving while commending investment. The truth is that saving has always been the villain in the Keynesian melodrama. As far back as The Economic Consequences of the Peace

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  A Violent World

  Modern Threats to Economic Stability

  • Jean-Hervé Lorenzi, Mickaël Berrebi(Authors)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  for risk-taking. It is in this respect that useful savings risks becoming a rare resource. The future relationship between savings and investment will be proof of this. Lendable funds need to be provided with a balanced rate of interest on the savings and investment market. Behind the apparent ease there lies a knottier problem, one that is more delicate 6 Savings, the Ultimate Rare Resource 126 A Violent World and more fundamental to the political economy. This balance, that is so impossible for some to find but obvious to others, has resulted in a massive intellectual battle between economists that has raged for two centuries. The battle rages between the Keynesians and the Neoclassicists. The equality between the two terms Investment vs Savings represents the results of a whole process that assumes that the economic stakeholders will all decide to save and invest. By doing so, they determine new levels of activity in the economy. Yet each agrees to state today that savings and investment are the products of separate developments, linked to its own taxation, the age of those involved and the macroeconomic pros- pects. The eventual balance depends largely on the overall state of the world economy. The balance represents the strongest constraint with which all economies are confronted and this will continue to be the case in any new configuration. This means that the coming balance will be a complete break with what happened in previous decades. We shall therefore move from abundant savings to rarer savings, from limited investment to a massive need for investment. The world’s macroeconomic trajectory has always been determined by the process that allows these two quantities, the amount of investment and the amount of savings, to come together ex-post, in which the level of balance is decisive for knowing whether or not the world can continue to grow significantly.

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  Investment Finance in Economic Development

  • Rogerio Studart(Author)
  • 1995(Publication Date)
  • Routledge

    (Publisher)

  Chapter 4Saving and financial markets in economic growth

  INTRODUCTION

  In the previous chapter the implications of the following three propositions, which are common assumptions in most post-Keynesian analyses, have been analysed in the context of growth: (1) investment is the causal determinant of output, employment and income; (2) from a macroeconomic standpoint, banks, and not savers, play the most fundamental role in the process of finance; and (3) the rate of interest may affect the investment decision and, especially, the allocation of financial wealth between different existing financial assets. The discussion of the theoretical reasoning behind, and institutional background of, these assumptions has permitted us to unveil the role of banks in a monetary production economy.

  We have showed that it is bank credit, and not saving, which plays the crucial role in the financing of investment. This would appear to leave no role for saving, but such is far from being the case. The present chapter develops the supporting role played by saving, and by financial markets in economic growth—a role which has been overlooked even by most post-Keynesian models. For this task, two hypotheses are examined: first, that economic growth is followed by increasing systemic financial fragility; second, that this financial fragility can be mitigated by funding, i.e. the issue of long-term securities by the investing firms to consolidate their short-term liabilities.

  The chapter is organised as follows. First, it presents a stock-flow model of finance, investment and saving from a Keynesian perspective. Then Minsky’s financial fragility hypothesis is reviewed in the light of the above-cited model; this review establishes that growth, in monetary production economies, increases financial fragility. Further the role of funding, saving and financial markets in achieving a financially stable growth is discussed. Finally, it applies the distinction between finance and funding to the context of an open economy.

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  Economics

  The Definitive Encyclopedia from Theory to Practice [4 volumes]

  • David A. Dieterle(Author)
  • 2017(Publication Date)
  • Greenwood

    (Publisher)

  Psychologically, the consumer is less likely to spend money that is not readily accessible. If the funds are transferred into a savings account, it is easier to consider that money “off limits” for discretionary spending.

  In summary, a savings account is an account in which money is placed to save for the near future. The focus of this account should not be on earning interest; it is there to pay for unexpected life events and near- to medium-term financial expenses.

  Danny Kofke

  See also: Credit Union; Interest Rates; Money Market Account; Retirement Accounts; Saving versus Investing; Vol. 1 : Foundations of Economics: Banking; Financial Literacy; Investing; Liquidity

  Further Reading

  Elwell, Craig K. 2010. Savings rates in the United States: Calculation and comparison (September 14). https://www.fas.org/sgp/crs/misc/RS21480.pdf (accessed September 30, 2016).

  Kapoor, Jack R., Les R. Dlabay, and Robert J. Hughes. 2009. Personal finance, 9th ed. New York: McGraw-Hill Irwin.

  Kofke, Danny. 2011. A simple book of financial wisdom: Teach yourself (and your kids) how to live wealthy with little money. Deadwood, OR: Wyatt MacKenzie Publishing Company.

  SAVINGS AND LOAN CRISIS, 1986

  The savings and loan crisis of the 1980s represents the greatest collapse of American financial institutions since the Great Depression. Although it had roots in the 1970s, the crisis was marked by the insolvency of the Federal Savings and Loan Insurance Corporation (FSLIC) in 1986. It was a classic bubble with overspeculation and excessive growth in the savings and loan industry. The FSLIC was the federal insurer of savings accounts at these thrift institutions, the thrift industry’s equivalent to the Federal Deposit Insurance Corporation. By the end of 1986, 441 thrifts with $113 billion in assets were insolvent, and 533 thrifts with $453 billion in assets were on a watch list for institutions with less than 2 percent of their total assets in tangible capital. The period 1986 to 1995 would see the failure of 1,043 thrifts with combined assets of more than $500 billion. The cost to the taxpayers of bailing out these institutions was in excess of $200 billion. The savings and loan crisis would result in a number of new regulations and a 50 percent reduction in the size of the industry. Even more interestingly, the savings and loan crisis would foreshadow the 2008 banking and mortgage crisis.

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  The Financial System, Financial Regulation and Central Bank Policy

  • Thomas F. Cargill(Author)
  • 2017(Publication Date)
  • Cambridge University Press

    (Publisher)

  Fourth, lending and borrowing are not necessarily equal for each sector, but, when all sectors are combined, lending equals borrowing because every act of lend-ing is an act of borrowing. Lending equals borrowing and saving equals investment for the entire economy even though they can be unequal for individual sectors. Fifth, financial institutions are fundamentally different from the three real sec-tors because their real transactions pale in comparison to their lending and borrow-ing and, by and large, their lending and borrowing are equal because that is their nature – they are an institutional conduit to transfer funds from one group to another. Chapter 4 Interest Rates in the Financial System 4.1 Introduction Interest rates are key variables in the nation’s economy and determined by the inter-action of lenders and borrowers in the financial system. Interest rates and changes in interest rates impact virtually every type of private and public spending, the finan-cial health of private and public enterprises, the value of wealth of individuals and the nation, and the economic and financial relationship a country has with the rest of the world. Not only are interest rates a key variable in every lending and borrow-ing transaction, they are the focal point of monetary policy. Virtually every central bank conducts policy by setting an interest rate target and then uses its tools of monetary policy to achieve that target. The interest rate target indicates the direc-tion of monetary policy. Lacking basic knowledge about interest rates is clearly dangerous to your own economic health, aside from the more general problem of being clueless about monetary policy and the financial system in general. This and the next two chapters discuss interest rates from three perspectives.

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  Removing Obstacles to Economic Growth

  • Michael L. Wachter, Susan M. Wachter, Michael L. Wachter, Susan M. Wachter(Authors)
  • 2016(Publication Date)
  • University of Pennsylvania Press Anniversary Collection

    (Publisher)

  2 An issue that has received insufficient attention in the literature is the great difficulty in measuring saving. For the most part, we have very little direct data regarding saving. Most authors determine sav-ing as the residual of somewhat erroneous income data and highly questionable consumption figures. This paper uses a different ap-proach. Saving is probably best thought of as the change in, or accu-mulation of wealth. That is, the amount a person, household, firm, or government has saved during a year is the increment in the net wealth of the person or institution. The most straightforward way, then, to measure saving is to compare two balance sheets (one at the beginning and one at the end of the period) of the entity under con-sideration. If both balance sheets are expressed in the same units (such as dollars of constant purchasing power), then saving will just equal the change in net worth. The problem with implementing this approach is that we have little wealth data for the U.S. Detailed cross-section household wealth data is extremely scarce and the distortions caused by inflation create many difficulties in computing real corporate balance sheets. The gov-Saving in the U.S. Economy 189 ernment sector is the worst in that no official attempt is made to construct balance sheets. The assets of governments, including de-fense equipment, social overhead capital, and large natural resource holdings, are particularly difficult to value. Attempts are being made, including an ambitious project currently directed by Michael Boskin at Stanford. The point that should be recognized, however, is that measuring saving, which is most fundamentally defined as the change in net worth, is at least as difficult as gauging net worth itself. There are at least two sets of national balance sheets available; those compiled by Raymond Goldsmith (1982) and those prepared by the Flow-of-Funds division of the Federal Reserve System (1983).

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  Turbulent Waters

  Cross-Border Finance and International Governance

  • Ralph C. Bryant(Author)
  • 2004(Publication Date)
  • Brookings Institution Press

    (Publisher)

  When accoun-tants consolidate the financial system as a whole, the inside assets and lia-bilities wash out. What remains in the consolidation are the assets of the ultimate savers who hold claims on the financial reservoir and the liabilities of the ultimate investors who have borrowed from it. Next, consider several fundamental points about money. For efficient transactions, the economy requires an agreed unit of account and an asset that can be used as a means of payment (sometimes referred to as a medium of exchange or a transactions medium). An asset usable as a means of pay-ment may also be regarded by some actors in the economy as a store of value. No advanced economy and its financial system have functioned without an agreed unit of account and some asset, or assets, readily and widely usable as a means of payment. Assets readily and widely usable as a means of payment are typically referred to as money. The money assets typically held by households and businesses are deposits in commercial banks and other privately owned financial inter-mediaries, plus a modest amount of currency notes and coins. In so-called narrower statistical definitions of money, the deposits may be only demand deposits. Broader statistical definitions may include time and savings deposits as well, and possibly even still other types of short-term claims on private financial intermediaries. Vast amounts of ink have been spilled on the subject of which definition of money is the most appropriate for macroeconomic analysis. Fortunately, that issue is not relevant here. 15 15. My own contributions to the sea of ink about the definition of money include Bryant (1980b, 1983). 38 Financial Activity in a Closed Economy It is necessary, however, to distinguish between reserve money and inside money. Reserve money assets are means-of-payment liabilities of the mone-tary authority, typically the central bank.

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