Final Stats on Personal Savings

D

drsteph

AP - The Commerce Department reported Wednesday that personal spending shot up by 0.9 percent, the strongest gain in six months, while incomes rose by a solid 0.7 percent.

<snip>

The bigger rise in spending compared to incomes kept the personal savings rate in negative territory at a minus 0.7 percent. That meant Americans spent more than their after-tax incomes, which forced them to dip into prior savings or increase their borrowing.

For all of 2005, the savings rate registered a negative 0.4 percent, the first time the savings rate has been in negative territory for an entire year since the Depression years of 1932 and 1933.

<snip>

Disposable income, the amount left after paying taxes, rose by 0.5 percent last month. The personal savings rate, the amount left after subtracting spending from disposable incomes, dipped to a negative 0.7 percent in January compared to a negative 0.4 percent in December.
 
It has occured to me that current global economic thought by TPTB (central bankers, policy makers, whoever) has been centered on Irving Fisher's equation

MV=PQ

Where:
M=money supply
V=Velocity of money
P= Price
Q=Quantity

Rearranging the equation gives us M/P=Q/V.

Thinking about this on a constructional basis, the china effect and wal-martization of the economy (combined with a declining value of the dollar in real terms) creates a declining P. This causes the value of M/P to rise. Therefore, the value of Q/V must meet it, either by increasing Q (not so easy to do) or by decreasing V.

To increase Q, in a world of declining V, you must increase M.

No doubt in my mind that this is part of Bernake's ideas and is closely related to inflation targeting.

However, I must confess, I don't understand how V is declining, unless it is a factor of long-term investing and cash placement into illiquid assets.

This is partially based on the GaveKal book, for those who might want to read it.

Any other ideas?
 
Hence, perhaps having a declining rate of savings, by this argument, isn't bad? It acts as a brake on V and increases Q.

Is this the new paradigm?
 
It's very easy to understand why money velocity could be declining.

Rich people are getting most of the new value from it and sitting on it or transferring it into financial instruments instead of physical instruments of widespread economic growth.

It also explains the "conundrum" of low long rates.

Take the limit example of an economy with one king and a population of serfs. They trade pennies and chickens among each other, and the king sits on tonnes of gold. The money supply could be large, and the velocity (remember to multiply by transaction size), negligible.

In China they are doing something different, they are pegging the yuan to the dollar.

What this means is that in practice the effective "size of the population" using dollars is growing rapidly. This is why the money supply in dollars is growing rapidly and yet there is little real economic growth in USA.
 
Wonderful, another month of negative savings. I often wonder what exactly these people are thinking.

I'm a uni student myself, so I'm familiar with being in debt, but mine is actually quite reasonable. Why? Because I've worked my butt off to put myself through school, paying as I go. First thing I'm doing once I start working full-time is paying off my debt. All of it.

My girlfriend knows that I like my tech toys, but I've made it clear to her that I don't plan on buying lots of stuff on credit. For example, maybe I would like a nice big TV at some point, but it sure as hell isn't going to be paid for with debt. The only things I would ever consider financing would be a home or some very long term assets (e.g. if I need a couch when we move in together). Even then the latter would still ideally be cash if at all possible.
 
you've been studying textbooks for too long.

for one thing, you say: "(combined with a declining value of the dollar in real terms) creates a declining P" what?? how does a declining value in real dollars decrease P in nominal terms? you're not even translating the real world into your academic equation correctly.

but whatever, there's a more important issue here:


MV=PQ

the variables being:
M = number of dollar bills in the system
V = how fast those dollars change hands
P = general price level (CPI-ish)
Q = quantity of goods and services purchased


ok. so now think about Q. the quantity of goods purchased. you're really telling me that you can't see ANY OTHER INPUTS to this equation that might affect the quantity of goods and services purchased? It's just M, V and P??? OF COURSE NOT. you've been sold a load of BS. yes money supply can be used to affect demand in the short run. give someone some dollar bills and yeah, they'll go spend it. BUT CREATING DOLLAR BILLS DOES NOT CREATE DEMAND over the long run.

you have to remember: MV=PQ is NOT AN EQUATION. It is an attempt at showing a relationship. A relationship that can be leveraged for political gain. hence the reason for its existence. (or persistence).


the genius perversion of this "equation" amazes me. suddenly monetary policy is the true engine of capitalism! of course in the long run we're all dead right? well i submit that the long run has finally come.



one other thing:
inflation <> rising prices
deflation <> falling prices
inflation = increasing the number of dollar bills in the system
deflation = decreasing the number of dollar bills in the system

years of propaganda has obfuscated the meaning of inflation and deflation, but once you have the definitions correct, things become a bit clearer.
 
Quote from FireWalker:


years of propaganda has obfuscated the meaning of inflation and deflation, but once you have the definitions correct, things become a bit clearer.
More...

"What good fortune for those in power that people do not think."

Adolf Hitler
 
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