A short thread on "S=I":
(I'm subtweeting a lot of you 😀)
Simple thought-experiment:
Imagine a monetary economy where *all* goods that are traded are *investment* goods (like e.g. new houses, that yield a flow of services to their owner-occupiers). 1/
(I'm subtweeting a lot of you 😀)
Simple thought-experiment:
Imagine a monetary economy where *all* goods that are traded are *investment* goods (like e.g. new houses, that yield a flow of services to their owner-occupiers). 1/
Then, for some reason, people start spending their stock of money more quickly (i.e. Velocity rises).
Investment and Saving (and output and income) all rise by the same amount.
Remember: "Saving" is defined as income from production that is *not* spent on Consumption goods. 2/
Investment and Saving (and output and income) all rise by the same amount.
Remember: "Saving" is defined as income from production that is *not* spent on Consumption goods. 2/
Or maybe it was "money creation", rather than a rise in V, that raised MV. Same thing.
"Credit creation" (borrowing/lending money) adds nothing to this story (unless it's the reason V increased).
But if the Central Bank holds MV constant (targets PY=NGDP) my story won't work. 3/
"Credit creation" (borrowing/lending money) adds nothing to this story (unless it's the reason V increased).
But if the Central Bank holds MV constant (targets PY=NGDP) my story won't work. 3/
I deleted trade in consumption goods from my story, to concentrate our minds.
Now let's add them back:
We now have a way for Saving=Investment to rise even if the CB holds MV fixed: a diversion of demand/supply/production away from C towards I. 4/end.
Now let's add them back:
We now have a way for Saving=Investment to rise even if the CB holds MV fixed: a diversion of demand/supply/production away from C towards I. 4/end.
