[webXL]

"And only consumers can set in motion this virtuous cycle of increasing demand and hiring."

When a consumer chooses not to buy something, i.e. commerce does not take place, saving occurs. Savings means there will be money available in the future. Money available for a small business loan. Money available to buy shares in a company, freeing up capital from the person you bought the shares from. That capital could actually end up in a new venture that makes it cheaper to produce X, or make X last twice as long, producing more savings in the economy.

That decision by the consume NOT to purchase something tells the producer that they better figure out some way to reduce the price, or go under. Capital, including human capital, frees up for more productive uses. Occasionally imbalances (e.g. too much capital tied up in housing) cause a massive recession, but most of the time this process is relatively benign. Victims of this cheap-credit fueled bubble and recession don't have money to save and invest right now, but innovation will provide jobs again one day. It happens every recession, sometimes longer than others.

Creative Destruction: it's the primary reason why we're all not planting seeds or hunting right now.

[thaumaturgy]

Respectfully, I think you are making an unfounded assumption about why consumers aren't buying things. I heard a news story just the other day about U.S. family savings being lower than recent history. This isn't it, but here's a similar article: http://www.standard.net/stories/2012/05/17/our-view-recessio...

i.e., consumers aren't "choosing" not to buy because they're saving the money instead, they're "choosing" not to buy because they don't have any money.

This is exactly why it is so, so important to foster a healthy middle class: they love to spend money. Give them $10,000, and they'll spend $9,000 of it.

We do not right now have a healthy middle class, and I'm super interested in whether or not our economy will recover without addressing that.

[kiba]

Respectfully, I think you are making an unfounded assumption about why consumers aren't buying things. I heard a news story just the other day about U.S. family savings being lower than recent history. This isn't it, but here's a similar article: http://www.standard.net/stories/2012/05/17/our-view-recessio....

i.e., consumers aren't "choosing" not to buy because they're saving the money instead, they're "choosing" not to buy because they don't have any money.

I don't see how your argument is necessarily justified by article. It seems entirely possible that families are trying to put food on the table, whenever possible, rather than save for the future.

This is exactly why it is so, so important to foster a healthy middle class: they love to spend money. Give them $10,000, and they'll spend $9,000 of it.

We do not right now have a healthy middle class, and I'm super interested in whether or not our economy will recover without addressing that.

How do you know if the middle class is healthy? Can you define middle class?

[thaumaturgy]

> It seems entirely possible that families are trying to put food on the table, whenever possible, rather than save for the future.

That's actually what I was trying to say, I probably just wasn't clear. I was responding to webXL's opening sentence, "When a consumer chooses not to buy something, i.e. commerce does not take place, saving occurs." I don't think that saving is occurring, I think that people are trying to put food on the table right now, as you say.

> How do you know if the middle class is healthy? Can you define middle class?

To be fair, I'm not aware of a strict definition of "middle class" -- it's one of those amorphous abstractions that everyone refers to without ever bothering to see if they're talking about the same thing.

However, if we define some basic properties of "middle class" -- owns a home (probably with mortgage), has some savings, has reasonable credit, owns two vehicles (for a family) of recent vintage and in decent condition, college educated, etc. -- I think it's pretty easy to see from the news of the last several years that they aren't doing too well these days. Their mortgage is likely upside-down if they bought their home in the last decade; their car is probably requiring more frequent repair; their credit probably isn't as good as it used to be; their savings are diminished; and tuition is expensive.

If you can find any recent good news for U.S. middle class families, I would honestly love to read it. :-)

[dmpk2k]

As an aside: are mortgages even a good thing? They seem to create their own market.

I.e. if there are no mortgages, people buy what they can afford and housing prices remain low. If there are mortgages, suddenly house prices skyrocket since buyers can afford vastly higher prices, making mortgages a requirement for owning a home.

A good position to be in if you're a bank; now you get a big slice of all action.

[thaumaturgy]

I'm undecided on that one. The theory of course is that it makes it possible for a family which can't quite make the up-front cost for a home to still buy a home, which consequently helps keep rents reasonable, which helps poorer classes get by.

But there are also the unintended consequences: people buy things they can't actually afford, like you said, and people begin to qualify for buying homes as investment vehicles, which really screws with things.

So I'm not smart enough to figure that one out.

[dmpk2k]

> it makes it possible for a family which can't quite make the up-front cost for a home to still buy a home

But does it actually have that effect? Once everyone is using mortgages, everyone is back in the same place as before mortgages.

To put it more concretely: before mortgages, houses might average around $100K because the average person simply cannot afford any higher. Once mortgages arrive, houses might spike to $300K, because your average person can afford that mortgage. So while the example family might not have been able to afford the $100K house because they had $80K, a mortgage won't help because now houses are around $300K.

So I don't quite grasp how this would affect rents. That seems to be an orthogonal issue.

[nhaehnle]

Savings means there will be money available in the future. Money available for a small business loan. Money available to buy shares in a company, freeing up capital from the person you bought the shares from.

While your statement is not entirely false, it paints a misleading picture of how the economy at large works. Outside of venture capitalism, credit for running businesses tends to be provided by banks, and banks just create the necessary money out of thin air whenever they find a creditworthy borrower, i.e. a business with a solid business plan and with a reasonable expectation of sufficient demand for its product.

When the overall savings rate rises, it becomes less reasonable to expect sufficient demand for products, which means less creditworthy borrowers, which means less loans given out by banks.

Occasionally imbalances (e.g. too much capital tied up in housing) cause a massive recession

Not quite. The recession isn't caused by capital being tied up in housing. "Putting capital into housing" is just economics-jargon for spending money on houses. And that tends to create jobs in the construction sector.

The recession comes about when private households can no longer use their houses as collateral for loans to fuel demand because the value of those houses is reassessed.

Creative Destruction: it's the primary reason why we're all not planting seeds or hunting right now.

I think you'll find that the primary reason why most of us are not doing these things is actually creative construction. The destruction part is only really beneficial when one gets stuck in a local optimum.

[JumpCrisscross]

>banks just create the necessary money out of thin air

This activity is ultimately underwritten by deposits.

It should also be noted that paying down debt is counted as saving from a statistical perspective. It just means value is being transported back in time versus forwards.

[nhaehnle]

This activity is ultimately underwritten by deposits.

Yes and no. First of all, deposits are created whenever a bank gives out a loan. So it is not the deposit that makes loan creation possible, but rather the reverse: creation of loans is where money in deposits comes from in the first place. Without loans there would be no deposits.

Now the outstanding loans given by the bank are on the asset side of its balance sheet and there must be something corresponding on the liabilities side. For most banks, deposits are indeed a large part of liabilities.

However, the liability may just be a loan from the central bank or from other banks instead. It's not strictly necessary for banks to have deposits at all (and there are banks which specialize in such a way).

The only reason why it makes sense for banks to attract deposits is that they typically pay less interest on those deposits than they would have to pay for other refinancing options.

And again, all this doesn't say anything about the dynamics of the system, i.e. it doesn't say anything about loan creation. It's not like there is some process where the banks say "Look, we have X more deposits than loans, so let's give out some more loans". Some banks operate with more deposits than loans, others operate with less. In the end, they give loans whenever they find a creditworthy borrower.

In the overall system, i.e. when summing over all banks, the sum of loans is roughly the same as the sum of deposits, because loans are where deposits come from in the first place. (I say roughly because owners of deposits can transform them into other types of assets such as bonds.)

[webXL]

with a reasonable expectation of sufficient demand for its product.

What determines sufficient demand? It's the chicken and the egg. Or is it: Profits lead to innovation. Innovation leads to cheaper goods. What's left over is new demand? Or demand dries up for product X, and demand is available for product Y?