OT: Rating the President

[orev_saara]

Oh, I remembered! I agree with Fyron that saving can become problematic if spending gets low, but we should remember that conspicuous consumption is one of our basic cultural values today, so it might balance out.

Or not.

[Fian]

While I can see how extreme savings can be bad for an economy, an extreme lack of savings is also bad. Currently American society spends more than they make. This is possible due there being money in banks to borrow (probably due to excessive savings in the past, plus foreign investment). If spending exceeds savings for a long period of time, one would expect that eventually the money in banks would run out, abruptly forcing an end to spending. This would be cause an abrupt end to spending, preventing future investment in infrastructure and new businesses, resulting in a major depression in an economy. A lack of savings would also result in a weak civilization unable to fight an extended war (one reason why WW1 and WW2 Lasted so long was because the European nations had a deep reserve of money, plus the Americans were also willing to lend money to European nations as well). On the other hand, a society with a high emphasis on savings would have a constant drag on their economy, never fully achieving their potential when it comes to economic output. I have never heard of civilization collapse due to excessive savings, but I suppose it is in theory possible, maybe driven by a threat of war.

One thing that I dislike about the presentation of economic theories in the classroom (my wife is currently taking an economic course) is that they tend to present truth in the form of black versus white. Spending is good. Saving is bad. I believe it would be better to look at economics as a series of competing forces that must be kept in balance. Encouraging spending is good, yet a certain level of savings is necessary as well. During economic good times, savings should slightly exceed debt spending. During economic bad times, savings should be slightly lower than debt spending. Can anyone disagree with this?

[dogscoff]

In response to:

By the way, it seems like the conservatives in this thread tend to outrank the liberals. Does this have some hidden meaning, or is it mere coincidence? Maybe I should do some sort of study...

look at the first few sentences of this.

[orev_saara]

Heehee... hey, wait! I'm an egomaniacal totalitarian whatever, and I... oh, yeah.

To Fian: The amount of money in the country is far from fixed. In fact, the vast majority of money doesn't even really exist. It's just ones and zeroes in computers. The actual amount of money increases all the time, so it isn't actually necessary for banks to have all of that borrowed money in reserve somewhere. Money has become almost completely abstracted.

Sigh... if only financial math weren't so Damned boring I could be rolling in dough right now with the rest of the actuaries...

[Fyron]

Fian:

No. Banks make more money by SPENDING it! They buy interest by loaning money out to people. They then loan out the money they make on interest, to make even more money. If people didn't spend more money than they make, and therefore have to borrow it from banks, and just saved all that they made in bank accounts, the banks could not make as much money, and so would loan out less at higher rates, and those that would have borrowed could not afford to borrow any money. As long as people are spending money, banks won't run out of it.

[ February 11, 2003, 20:21: Message edited by: Imperator Fyron ]

[Fian]

"No. Banks make more money by SPENDING it! They buy interest by loaning money out to people. They then loan out the money they make on interest, to make even more money. If people didn't spend more money than they make, and therefore have to borrow it from banks, and just saved all that they made in bank accounts, the banks could not make as much money, and so would loan out less at higher rates, and those that would have borrowed could not afford to borrow any money. As long as people are spending money, banks won't run out of it."

Wow, I didn't realize what I was talking about was viewed as so controversial. Question one: How do banks get money that they can loan in the first place? Someone chose to deposit it in the bank. What if no one ever deposited money into a bank, how much money would the bank have to loan to the spenders? 0. If a bank has 1 million dollars, and 100 people want to borrow that million dollars, who will the bank lend the money to? The person willing to pay the highest interest rate for it (or if the rates are regulated, maybe they will hide the extra money in "fees" that they charge). If 10 banks have 1 million dollars, and only one person is interested in borrowing it, what interest rate will the person pay? The lowest rate offered by a bank.

Based on the above comments, banks need people to save in order for them to exist. If there is too little money saved, interest rates will be pushed higher due to competition (supply versus demand). If there is too much money, interest rates will be pushed lower (supply versus demand). Greenspan setting interest rates confuses the matter, but I am sure that feedback from banks in regards to their supply does affect the decisions that he makes as well. If people should be encouraged to borrow more so that they will spend more, why does Greenspan ever raise interest rates? The reason is that the rate of spending needs to be balanced, not overdone.

"Banks make more money by SPENDING it!"
If you consider a person depositing money into a bank which is then loaned out to another person as "spending." Then I would agree that "spending" is good. I recommend more people "spend" their money by depositing it in a bank.

"If people didn't spend more money than they make, and therefore have to borrow it from banks, and just saved all that they made in bank accounts, the banks could not make as much money"
I agree that if everyone saved and no one borrowed, then there would be an economic problem. They key here is balance. Saving versus spending must be kept in balance.

"As long as people are spending money, banks won't run out of it."
I am not sure about this, but I don't believe that the interest that banks earn on their money is lent back out in the market. Most of the interest made is paid out to those who deposited their money in the banks, staff/equipment who run the bank, and shareholders who own the bank. The rest of the profit could in theory be deposited back into the bank, but I have doubts about that keeping pace with inflation/growth of the economy. If inflation or the economy grows faster than people save, you will eventually run into a point where the banks don't have enough reserves to satisfy all of the loan requests resulting in higher inflation.

[Phoenix-D]

"If 10 banks have 1 million dollars, and only one person is interested in borrowing it, what interest rate will the person pay? The lowest rate offered by a bank."

If 10 banks have 1 million dollars, and -no one- interested in borrowing (because everyone is saving as much as they can), what happens? The bank goes out of buisness. This is what Fyron is talking about.

Phoenix-D

[Fyron]

Fian:
It is not controversial, you are just confused as to how banks operate.

Of course if no one deposists any money in the bank they won't have any to loan out. But, there are always people depositing money in the bank. And even if no one deposited for a while, banks own stocks in the stock market, and make money off of that. They already have money in their vaults (~80% figuratively, depending on the current Federal Reserve Rate), and loan it out to make profit off of. It would take a bizarrely unusual amount of circumstances to deplete the banks of all money with how the banking system operates in this day and age.

People depositing money in the bank are not spending it. The bank goes and "spends" that money to make more money. There is a colossal difference.

I am not sure about this, but I don't believe that the interest that banks earn on their money is lent back out in the market.

Almost all of it is loaned out to new customers. Banks make a lot more money in interest than their operational costs and the interest they pay people with savings accounts.

The interest made on a savings account is designed to be significantly less than the rate of inflation, and so the banks minimize their losses on savings accounts.

[jimbob]

If people didn't (1) spend more money than they make, and (2) therefore have to borrow it from banks, and just (3)saved all that they made in bank accounts, the (4)banks could not make as much money, and so would loan out less at higher rates, and those that would have borrowed (5)could not afford to borrow any money.

I don't know. I think that banks have become pirates who take and take. I personally think it would be better for most nations/economies if people worked with people to make things happen instead of people borrowing from institutions (and my goodness, there is a huge difference between how people interact with eachother vs. how institutions treat people). I honestly feel that one of the worst things in the modern era is the degree of indebtedness people are in to their respective institutions, and usually only because they're addicted to buying beyond their means!!! (oooh.. gotta have that DVD player, that brand new car....)

1) people spending more money than they make results in/is deficit/debt spending. I don't know why our current society believes that this is a good idea, but it sure is addicted to it. Look, if someone needs a car, they should buy within their price range or save up until they can afford it. Constant interest payments aren't good for people!

2) that said, there are times when large investments should be made (ie starting a business). but this doesn't necessitate the existance of banks, it actually requires somebody with liquid assets, eg. a business partner. When loaning money, the bank is just a business partner who gets paid interest for not showing up to work!

3) with the paultry interest rates and the amount of service charges, the only thing the bank has over my trusty mattress is a few armed guards and a vault door! People should save some money, but they should also invest some money. They should not give any of it to the banks, because their money ends up with shareholders - instead they should invest so that they are the shareholder! But hopefully they can be the shareholder of an organization more productive/valuable than just a money-grubbing bank

4) this assumes that banks are a required institution... they're just a handy institution, not a requirement for a healthy thriving economy.

5) and so people would have to band together to start up capital projects, businesses, etc. etc.
Hmmm people working together, people dominated by a bank, people working together, people dominated by a bank....

I just think there are some weak/sick points in how our modern economies run, is all.

[ February 14, 2003, 01:00: Message edited by: jimbob ]

[Fyron]

1) people spending more money than they make results in/is deficit/debt spending. I don't know why our current society believes that this is a good idea, but it sure is addicted to it. Look, if someone needs a car, they should buy within their price range or save up until they can afford it. Constant interest payments aren't good for people!

Can you afford to go write a check for a brand new car today? The whole thing at once. What I meant was, I can't afford to buy a car today. So, I take out a loan to spend more money than I have. I pay the loan back over a period of months/years, as I can afford small payments over a time period, but not all at once. Take houses for a better example. Who (that is not rich) could afford to go write a check from their checking account and buy a house today? Almsot noone, that is who.

This is what banks are for. Banks are a necessity.

[ February 14, 2003, 01:05: Message edited by: Imperator Fyron ]