08-19-2014, 08:02 PM #103
laughing dog
(continued)
Lower interest rate means less saving, not more. To say otherwise is asinine. Of course people save less when they are deprived of the benefit of receiving any interest, or if the interest rate is suppressed from 1 or 2 or 3% to near-zero. You have no evidence to show otherwise. Just because savings is also responsive to other factors does not change the fact that it is responsive to the interest rate.
In the US, savings does not seem to be correlated with interest rates.
I don't believe you have proof of this, or strong evidence. You can cite a few economists who believe it and even claim there is evidence for it, but they are oddball economists with their own goofy interpretations, and are not in the majority.
The U.S. savings rate might be lower than in most other countries, yes, but that doesn't indicate that there is no correlation of the savings rate to interest rates in the U.S. or anywhere, i.e., higher interest rate causing higher savings rate.
Do economists generally agree that there's no correlation of interest rate to savings rate? Do they reject the traditional market principle that higher reward (interest) leads to increased behavior to get that reward? I suggest this notion is held only by a small minority of economists who are on a crusade to debunk traditional supply-and-demand market theory.
Such ideologues probably could come up with some "data" somewhere that they can twist in order to provide seeming support for the idea. But how much do they leave out of their analysis in order to come up with this theory which contradicts supply-and-demand? I doubt that most economists subscribe to this notion.
In theory, a reduction in the interest rate has two possible competing effects on saving. First, it reduces the return on saving, which, by itself, should reduce savings (in economics, this is called the substitution effect). However, a reduction in the interest rate also means it takes more savings now to reach a desired future goal, which, by itself, should increase savings (the income effect).
No, you're assuming that there is a target figure a saver is thinking about in adding to his/her savings, and that when this amount is finally reached there is no longer any more need to add to the savings. This is not what savers are doing generally. Even in cases where they do have some such general figure in mind for the future (which is probably fewer than half of them), there are 2 reasons why it does not cause them to stop saving when they reach that point:
1) they never do reach that point, because it is set rather high and is difficult to reach, and they continue saving at the same rate (and sometimes neglecting to save because it's too difficult), and so there is never any real decline in their savings rate, which goes up and down (but more often up); and
2) even in cases where they do reach that target figure they thought of earlier, by that time they are driven by the same urge to save still more, because the goal changes, the need for future security drives them to want to save even more, and the increased wealth they have accumulated causes their demands for the future to increase and thus increases their perceived need for future savings.
No doubt you have found 1 or 2 economists who subscribe to this theory of reduced need to save once the "desired future goal" is reached. But this again sounds like oddball economics and not mainstream. These are crusaders who are out to prove that "the world is flat" as it were.
Though "income effect" and "substitution effect" may be standard rhetoric for mainline economics, for analyzing consumer choices, it looks like a stretch to apply this to savings/interest rate to prove that higher interest rates are not a net incentive to increase savings or are not correlated to a higher savings rate. That is not mainline, but oddball.
Since these have opposite effects, the outcome is an empirical question.
No, these do not have equally-opposing or offsetting effects. It's not true that a significant number of savers are targeting a "desired future goal" and when reaching it then change and stop saving. Though such behavior has an "opposite" effect in terms of the interest rate, there are so few savers who fit this description that this behavior does not offset the far more common behavior of the vast majority of savers who do not have any such "desired future goal" of some target figure at which point having been reached they then stop saving.
It is asinine to claim that one can logically show one effect is larger than the other or that one effect is sufficently larger than the other.
The logic is that your premise is wrong, i.e., the premise that the urge to save is confined to a single "desired future goal" in the sense of some particular target figure, of so many dollars, that one needs to reach, like the finish line in a race, at which the point the effort ends and one no longer strives to save or the urge to save disappears. Since this premise is false, your conclusion is false.
If one is thinking of long-term future financial security, it's obvious that one's perception of how much they need changes as their wealth level increases, and there is no such "finish line" at which point they don't need to save any further.
And logically it's undeniable that in cases where they never reach the "desired future goal" target figure, their effort never ceases and the saving urge keeps driving them to save as they are able to.
How often has someone said: "Well I finally have reached the amount needed for my goal, so I'm not going to save any more."? This is not the real world, real people. The urge to save is not that fixed on some single target figure, in the sense of a particular number that stays the same over many years. Yes, maybe for a few months or a year or 2, but that figure starts changing as the conditions change. The basic urge to save is not fixed in that way and continues to drive them on to higher savings and higher future goals.
That fundamental instinct to save does not end but rather drives the saver on.
In many cases the interest accumulated is only a small part of the additional savings, so that it has only minimum effect in helping one reach a "desired future goal" because it's one's earnings or revenue that is the main addition to the savings and not the interest accumulation.
Empirically, in the US, savings does not appear to be change much due to changes in the after-tax return.
You are wording this too carefully, which indicates that you have no empirical evidence that higher interest rate does not encourage higher savings rate. All you have any evidence for is that the savings rate in the U.S. is lower than in most other countries. But there is no evidence against the market principle that higher interest rate leads to higher savings rate.
This might make sense if you mean that the Fed really has done nothing at all to suppress interest rates, but rather has found it necessary to force bank reserves upward, and that only this leads to lower interest rates, which is a RESULT, even an UNINTENDED result of forcing the higher bank reserves.
Increasing bank reserves also means interest rates are pushed down. Changing the level of bank reserves will change interest rates.
That's not the point. The point is that you're implying that there is no goal by the Fed to reduce interest rates per se, but only to increase bank reserves. You're saying that they do not do anything to reduce interest rates, i.e.,
for the purpose of reducing interest rates, but rather that the lower interest happens only as a byproduct of what they really want, which is to increase bank reserves.
And therefore all the talk we hear about suppressing interest rates is a deception, because this is not what the Fed really wants to do, even though everyone including the Fed keeps saying this is what they want. And this makes no sense. There is no reason for them to keep saying they are suppressing interest rates for the sake of these lower rates per se if this is not what they really want, i.e., if this is happening only because it's a byproduct of the increased bank reserves.
What would make sense is for them to say what they're really doing (if you're correct), which is to increase bank reserves, and, if need be, explain that interest rates might decline as a byproduct of this. But since they don't say this, it must not really be what they're doing. What they're doing is suppressing interest rates per se, as a goal in itself.
And the only explanation for it is the need to goose the economy, i.e., "jobs! jobs! jobs! jobs! jobs!" etc. And this explanation is getting worn out and it's amazing that people are not getting tired of it and saying "Shut up! We're tired of you imposing all this cost onto us only to promote this 'jobs! jobs! jobs!' obsession."
Where is the evidence that this preoccupation with "jobs! jobs! jobs!" and "economic stimulus" has been worth the cost we've had to pay for it? How do we know these measures in the past have not simply forced us to enact still more of them now, at still more cost, to sustain the "jobs! jobs! jobs! jobs!" levels they created earlier? Are we not now addicted to doing more and more of the same only to sustain those previous "jobs! jobs! jobs! jobs!"? at the cost of continuing higher inflation? and suppressed savings? and higher national debt (in the case of Congress and its ongoing deficits)?
In fact isn't the Fed really trying to pick up where Congress is partially leaving off (for fear of too much higher debt), by continuing the "jobs! jobs! jobs!" stimulation in a different form than the high deficits the Congress kept running for several years? Weren't there demands from pundits like Krugman and others to increase the "stimulus" amounts much higher, and isn't the Fed trying to accommodate these demands (or at least to maintain the deficit "stimulus") with their alternative QE version of "stimulus"?
And isn't this also what the lower interest rates are for? not a byproduct of something else (higher bank reserves, which no one talks about), but a tool to try to goose the economy as the budget deficits are declining and are no longer high enough to provide the necessary goosing the economy supposedly needs?
It's obvious that this is what the suppressed interest rates are for, and are not something that just happens accidentally as an unintended byproduct of higher bank reserves.
So QE was not intended to save or create any jobs, according to you. So your whole premise is that QE had nothing to with reducing unemployment or combating recession. It had nothing to do with promoting "economic growth" or preventing the economy from "slowing down" or with "stimulating the economy" and so on. And anything you said earlier that QE was intended to "save" jobs was false. Or you never said such a stupid thing. OK, I stand corrected. It had nothing to do with unemployment or the recession. And whenever the Fed chairman said something about the recession, I only imagined it, or s/he was lying.
I cannot control what you imagine. Apparently, I cannot influence what you glean from reading posts, because you continue to repeat the same old straw man and economic ignorance.
Translation: Of course QE was intended to save or create jobs and goose the economy, and also the suppressing of interest rates is for this purpose and is not simply a byproduct of increasing bank reserves, which is completely off the topic. The issue is: Why do they suppress interest rates and why did they do QE? And the obvious answer is: to goose the economy, "jobs! jobs! jobs! jobs! jobs!" just as the budget deficits were intended for.
And no one can explain how this "jobs! jobs! jobs! jobs!" obsession is making the economy any better off in the long run and is anything other than a quick-fix instant-gratification measure each time, with no long-term benefit.
You can give no reason why $1 trillion QE was good for the economy but that $2 or $3 trillion would have been too much.
It's caused by the obsession to save or create "jobs! job! jobs! jobs! jobs!" Just as the Fed's actions are based on this obsession.
Your belief in this does not make it a fact.
All you disagree with is the word "obsession" and the "jobs! jobs! jobs!" terminology. But you cannot deny that the Fed's measures were done for the reason I'm giving, with the only qualifier that you don't like the terminology. You have given no reason for the Fed's behavior other than what I'm calling the "jobs! jobs! jobs! obsession" but what you want to call by some other name.
Will you agree that this is the reason if we just call it the "jobs! jobs! jobs! concern" instead of "obsession"? Or how about only "jobs! jobs!" instead of "jobs! jobs! jobs!"? Or eliminate the exclamation points? Why are you so hung up on the semantics and punctuation instead of the substance?
But according to you neither the Congress or the Fed has any concern with jobs or recession or "economic growth" or unemployment. Probably even the President cares nothing about unemployment or jobs, according to you. And no economists care about it either.
I never wrote nor implied any such thing. Concern and obsession are different concepts.
You only object to calling it an "obsession" -- other than this, you agree with me that the Fed's motive or reason is "jobs" -- and the only difference is that I call this an "obsession" and you're offended at this terminology. And you cannot explain the need for these "jobs" and have no more explanation for the Fed's behavior than that of an "obsession" or being driven to do something without giving a good explanation for it. Or that of a drug addict who is driven to get another fix and can't explain the need for it other than as a quick-fix gratification.
You said you were going to give us an explanation why $1 trillion was necessary whereas more than this would be too much. But you gave no such explanation, as I showed above. So since there is no explanation for this $1 trillion QE, what's wrong with calling it an "obsession"? Isn't it an "obsession" when someone is driven to do something but can give no coherent explanation or reason for it? And especially when its devotees fall all over themselves pretending to give a reason or explanation but still fail to do so?
QE works through the private sector. And you said that the private sector is the best judge of whether or not a job is beneficial. So, if any jobs are saved or created from QE, they cannot be not worthwhile.
If I said any job in the private sector has to be a net benefit to society, I was an asshole at that moment.
If that job has to be subsidized by a government (including Fed) "economic stimulus" program that we all have to pay for, then it is not a net benefit to society. If it's only because there was an injection of new money into circulation that those "jobs" were created, then those "jobs" are coming at a cost to society that a net beneficial job does not require, because a true beneficial job creates enough benefit so that it is paid for by those who buy the company's product or service. This is how a beneficial "job" is paid for, not by inflating the money supply to cause artificial uncompetitive "jobs" to be created.
(Obviously there are many jobs which cannot be neatly categorized into the net beneficial vs. the subsidized ones. The difference is clear, and some are clearly in one category or the other, and others are marginal and cannot be clearly categorized. Still the basic difference is that the net beneficial jobs are those that would exist anyway, without the "stimulus" that was necessary to cause the artificial jobs.)
This does not contradict anything I said about the private sector having a natural incentive to reduce or eliminate unnecessary jobs. The profit motive gives companies this incentive, but if the state pays them to do something counterproductive or unnecessary, then of course this distorts that incentive and drives the company to hire unnecessary workers, such as a "jobs" program or other corporate welfare program. In this sense there have no doubt been tens of millions of non-beneficial jobs in the private sector, because the state subsidized those jobs.
QE does not subsidize jobs.
Companies that benefit from QE and hire workers they would not otherwise have hired are getting an effective subsidy.
What about some rich investors who benefit from QE, as SimpleDon claims -- aren't they being subsidized, assuming SD is correct in saying they benefited from QE?
And if you recognize that such a benefit is a "subsidy" to those rich investors, why isn't it also a "subsidy" to anyone else who benefits from QE? like a business that gained higher profit and was able to hire more workers, or like any workers or jobseekers who got hired? Why isn't that a "subsidy" to them just as much as a benefit gained by a rich investor is a subsidy?
No. If is still being debated, it is not proven.
Has it been proven that the Earth is round (spherical) and not flat? This question is still sometimes debated. There was a radio talk show a few years ago in which a guest representing the Flat Earth Society debated this with the host and several callers to the program. The guest gave many arguments that the challengers could not answer.
Isn't that a "debate"? If people disagree on a topic and argue, isn't it a "debate"? Do you claim that only recognized "experts" licensed by the State are true "debaters" and all others are charlatans or imposters? Are the arguments on this message board real "debates"?
I said the Fed has never "proved" that QE was a net benefit and that we should not just take their word for it. This doesn't mean "proving" it as an absolute truth, like a tautology such as 2 + 2 = 4. It means making a strong case, giving strong evidence, whether empirical data or deductive logic or just "common sense" that clearly demonstrates the benefit and relatively low cost of the QE in terms of inflation or other damage.
It's not good enough to show that some "jobs" were created, which no doubt is the case, but making the case that these "jobs" were worth the cost that society had to pay. If the QE had been $20 trillion isn't it obvious that any "jobs" created would not be worth the cost society would pay for all that extra inflation?
Shouldn't the Fed or its devotees be able to give some evidence ("proof") that the extra inflation caused was relatively small compared to all the needed "jobs" that resulted? Shouldn't they have to give some evidence or "proof" that these extra "jobs" were really worth it? Do we just have to take it on Faith that there was a net gain rather than a loss?
But such "proof" does not mean that the issue is closed forever and that no more debate should take place. You are wrong to say "If is still being debated, it is not proven." No, in the loose sense it can be proven, i.e., a strong case can be made, enough logic or data offered to support the claim, e.g., that QE worked, even though there can still be doubt and questioning of it and further debate.
Aren't many issues still debated that were "resolved" and decided upon in the past based on "proof" given by those who favored one side and prevailed or got their view adopted? Hasn't it been "proved" that Oswald alone shot JFK? Hasn't it been "proved" that LBJ's War on Poverty succeeded in reducing poverty in America? These questions are still open to "debate" even though one side "proved" they were right and won the argument for now.
As long as everyone who speaks on it says a stable price level is good, and as long as no one speaks up and claims otherwise, it's reasonable to assume that everyone agrees that a stable price level is good. There is nothing to argue about or to prove if everyone who has anything to say agrees with this. No one is arguing that the price level should be unstable, and so there is no need to argue it or try to prove the need for a stable price level.
Since the central banks around the world do not speak that a stable price level is good . . .
Yes they do speak that.
. . . nor do they act to maintain a stable price level . . .
Yes they do generally, or try to. When they fail, it's because of some kind of mistake or carelessness, but not because they don't want a stable price level.
. . . it should be obvious that not everyone agrees that a stable price level is good.
No that's not obvious. They all agree that a stable price level is good, and no one says otherwise.
So anyway, everything you're saying on this topic then is based on your premise that Central Banks generally do not want a stable price level?
So in the 1920s when Germans had to take a wheelbarrow-full of Marks to the store to buy a loaf of bread, there was nothing wrong with that? It isn't "good" to have a price system that avoids that extreme inflationary condition?
You are employing the fallacy of the excluded middle to create a straw man. I did not say that the preferred alternative to a stable price level is hyper-inflation.
You didn't say it wasn't. You didn't rule it out. So now will you rule it out, to set the record straight? Is inflation like that of Germany in the 1920s a bad thing? And if so, why is it bad? In your effort to say why it's bad you will find it difficult not to appeal to the need for "stable" prices.
And what about the more moderate inflation the U.S. had in the late 1970s and about which there was much wailing and gnashing of teeth. This wasn't bad for the country? Why was it bad? Try to explain why it was bad without implying there's a need for "stable" prices.
If you prescribe an inflation rate to stay within the range of around 1-2%, and not go higher, that is just a different prescription for a "stable price level" than one of keeping it at zero. The only argument for such an inflation rate (above zero) is that you think this is actually more "stable" than one at zero.
To say a "stable price level" is not an agreed or desirable goal is engaging in semantics and not substance. You can't quote anyone advocating an unstable price level.
