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To the first: Why?

I mean you are right, that an increase in the savings rate has something to do with net exports and investement, as the saving has to be put somewhere. But savings is the trigger, the thing which people decide to do. Investment isn't too strongly dependent on local savings rates. If you want to borrow money for an investment and nobody in your country saves, you may import the money from another country where people do save.

And given that, there is no reason, why the output should not go down, when people start to save more money. There will be less demand for foreign financing of US investment, but when they buy less domestic products, the producers will produce less. If in the US something similar happens as in Germany from 2003 - 2005 I would call it trouble in the short term.

Of course in the long term that is the right thing to do, still.

To the second, this is clearly wrong.
You can increase your savings rate without higher income, when you stop buying stuff you formely bought regularly. This is what must happen in the US. People there (aggregated, just to mention, that nobody complains he didn't) have lived quite a lot beyong their means. The time of recognizing this is close, either somewhat voluntarily now, or forced in a few years.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Wed Aug 27th, 2008 at 03:03:03 PM EST
[ Parent ]
There are not two distinct decisions ... one to spend out of income and a second to save out of income. There is only the one decision ... whether or not to spend out of income. The sum total of disposable income not spent is the sum total of income saved.

The fiction of the independent power of "savings" is very useful for justifying policies in favor of the wealthy, but not very useful for actually following what is going on with an economy.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Aug 27th, 2008 at 04:44:46 PM EST
[ Parent ]
There are not two distinct decisions ...
Where have I claimed this?
Sure there is only one decision. But no private preson makes the decision to make an CA surplus. Your first and this comment don't frame the issue in the same way. If you had set, people decide to spend less, instead of what I said, people save more, then this would be the same. And pointing excatly to the reason, why in the short term a problem occurs: because suddenly people spend less.

I don't see really the point you want to make.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Wed Aug 27th, 2008 at 05:01:12 PM EST
[ Parent ]
Yes, but framing it as "if people should save more ..." supports the neoclassical model in which fundamentals establish the equilibrium level of output and a "saving" decision plays an active role in setting the interest rate.

The next round effect of the decision is the loss of spending, both in terms of a reduction in exogenously financed consumer spending and a reduction in the propensity to consume out of income. So the consequential dimension of the decision is the decision to cut back on spending.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Aug 27th, 2008 at 05:35:43 PM EST
[ Parent ]

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