16.3 Myth of saving as necessary tool for prosperity.
There is this widespread belief that our problems are stemming from too much consumption on credit and so salvation can be found only in return to traditional values of saving and capital accumulation. Consumption should be limited to income and saved money.
My theory already explained that consumption on credit is not living above one´s means but necessary tool to provide missing buying power. Without loans, either private (short term fix) or state (longer, but still not permanent solution) we simply would not be able to achieve profits on aggregate level as such.
However, there is also another reason why saving is not good at all in macroeconomic sense.
Imagine you have 100$ in your bank account. If you save these funds they will be available for lending to other individuals, businesses or state. If you choose to spend them, they will be deducted from your bank account and immediately added to bank account of venue, where you spent. So your account will be 0, but somebody´s else will now read +100$. Final amount in the banking system remained totally unchanged, only position of these 100$ changed. This all happened in a fraction of second and the bank have the same amount of money to lend as if you had ”saved” them.
The outcome of this is such, that by saving you are not accumulating any additional capital that would be otherwise not available. The money in banking system is still there, banks can lend them and if you save the only difference you make is that you are voluntarily denying yourself available goods and services in belief that you will be able to consume later. That, as explained in previous chapters is not as sure as one may expect. There are many reasons why future consumption may be not possible at desired level (orchard example) at all or at rather inflated prices significantly lowering the value of saved funds.
Simultaneously you are diminishing realizing buying power in that period and so causing lower profits for companies. This leads to lower taxes, possible unemployment, and recessions.
What would happen if all people decided to save all their monthly salaries just for a single month in order to “help the economy” by accumulating capital?
The answer is so obvious. The economy would collapse and serious recession would settle in immediately. The good people following such advice might be surprised what is happening.
It is rather difficult to believe that such advice is still being given and advocated as really needed. Every dollar saved is indeed contributing to the very same scenario, because saving today is not what it was 100 years ago. Today it just means that you are lowering the economy´s turnover and so GDP growth with all its related consequences (faster debt to GDP growth, higher unemployment, lower taxes…)
In the past there was some truth in that advice as money in the form of gold and silver coins not transferable electronically needed to be deposited physically to the bank as only means possible to make it available to further lending. If at that time money was not at the bank (but buried 1 feet underground in some chest), it was not moving as possible. But we are now in 21st century. The situation is dramatically different. Today even if you are not “saving”, you are indeed providing money to the wider public through their depositing at the bank and making electronic payments, which enable their immediate availability.