Thread by @AtifRMian

What is saving?

The number we "save" in our bank account out of the pay-check is just that - a number in a computer

Our hope when we save is that the number means something. But that cannot be taken for granted

The most important rule in economics (and life) is that things must balance, else we have a problem

The same is true of saving, and whether "saving" is really saving

Think of the economy as a flow of stuff we produce, say 100 apples and oranges (A`nOs) in a period

The A`nOs represent the "real" economy, this is what really matters. We may assign some $ value to it, like 1$ for an apple.

But that's just some number in a computer - who cares!

What really matters are the A`nOs .... this is what economists call the "real economy"

The A'nOs we earn every period is our "real income"

How can we save part of it?

We can try putting some A`nOs under a tree, but they will just rot and we'll be left with nothing

The point is, it is not so easy to save

For us to be able to save successfully, a person (let's call her Jane) must come along who,

(a) is willing to eat our saved A'nOs today and

(b) credibly promises to return our A'nOs tomorrow, plus a bit more

(a) must happen, else the economy doesn't balance and we have a serious problem

This might be a good time to talk about people like Jeff Bezos who earned billions last year

That is a LOT of A`nOs for one person to eat in a year. So naturally, Jeff "saved" most of them

But for Jeff to be able to save, Jane has to eat a lot of A`nOs

Maybe Jane, and some of her friends, can muster enough courage to eat all of the A'nOs that Jeff wants to save today

But that doesn't solve the problem in the long-run if Jeff keeps getting richer every year ...

Jane has to keep eating more and more A'nOs every year!

So lets pause here and imagine that Jane just refuses to eat any additional A`nOs

Now we have a big problem, because everything must balance

If no one wants to eat Jeff's "saved" A'nOs, they cannot be saved!

They will just rot and get destroyed. The economy's total output will shrink and we will be in a recession!

This is not just some fantasy, but we are living through it right now - it's called a "liquidity trap"

In fact, the problem got worse during the pandemic because it is not just Jeff - but many more well-off people are also trying to save more than before

A'nOs are getting destroyed in this liquidity trap and we collectively are poorer as a result

There is an interesting twist here, that should be of interest to the politically-minded

You see in my story the A`nOs that literally rot and get destroyed belong to Jeff, and so you might think that it is Jeff who becomes poorer in a liquidity trap

No

*someone* will get poorer, but it most likely will not be Jeff - I'll skip the reasoning here

Let's get back to our story, and focus on (b):

Jane does not have the luxury of eating Jeff's saved A'nOs and forgetting about it: she must return those A'nOs tomorrow with interest

If Jeff keeps getting richer, the fact that Jane has to return A'nOs eaten in the past represents a double-whammy

Jeff is saving more and more A`nOs and wants Jane to eat them, but Jane first has to return her borrowed A'nOs from the past plus interest!

This just makes the whole dynamic even more unstable, i will call this the "indebted demand" problem

For a while Jeff can sustain Jane's borrowed consumption of A'nOs by lowering the interest rate

But once interest rate hits zero, we are back in the "liquidity trap"

Why? because interest rate cannot be negative (well they can be, but that will be a wealth-tax and some people just go crazy at the thought it appears)

ok ... i tried to simplify the story as much as i could ... the wonkish among you might be thinking ... wait wait, what about investment .... well, it doesn't matter, here's the formal story with evidence in two papers:

scholar.harvard.edu/straub/publica…

scholar.harvard.edu/straub/publica…