[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?