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1/n Long thread: Analysts at times use macro terms like consumption, savings and investments in an everyday sense. But these terms imply very different things when seen through a macro rather than household lens. This very long note describes how & why https://ananthindianmarkets.blogspot.com/2020/12/everyday-terms-in-macroeconomics-and.html
2/n Am not a trained economist, so I ran this note past a few experts. Thanks to many for the responses/ edits. There are admittedly many disagreements, but also overall endorsements from some strong & credible voices. Here are some takeaways from the note, open for debate.
3/n Unlike households, an economy cannot increase total savings with austerity in consumption of domestic goods. That would only reduce GDP growth, leaving savings unchanged. Corollary: more consumption of domestic output doesn’t alter the stock of savings (ignoring taxes).
4/n An economy can indeed increase savings by reducing imported consumption, as we did through 2020. But seeking to reduce imported consumption while growing domestic production can be a slippery slope, with many questions around protectionism, choices, quality and efficiency.
5/n Pleas to increase savings tackle the wrong end of the issue. An economy’s total savings doesn’t increase by itself, but only with more investments, govt. deficits, or net exports. Rather than rue low savings, the focus should be on increasing productive investments & exports.
6/n Calls to increase savings are akin to calls on banking system to raise deposits. How? From where? Systemwide, loans/ FX inflows/ govt. spends create M3/ deposits, not the other way around. Likewise, investments/ net exports/ deficits create savings, not the other way around.
7/n An aside: claims that savings from more exports can fund the govt are misleading. More net exports are matched by more savings, they don’t create ‘free’ savings. Plus, govt spend creates its own savings. But more savings can cheapen govt borrowing costs, subject to inflation.
8/n Investments or govt. spending funded by banks (or RBI) creates new savings in the form of fresh money. As very mobile savings, money can spur economic activity and/ or inflation. In contrast, investments or govt. spending funded by savers creates savings, without fresh money.
9/n Govt. borrowing & spending doesn’t immediately ‘crowd out’ investments by using up 'limited' savings. In fact, govt. spending creates fresh savings. However, high deficits can push up inflation & interest rates, & so depress investments. 'Crowding out' is subtle, not direct.
10/10 All this is based on chapters 1 & 2 of Dornbusch, Fischer & Startz. From my chats, economists differ even at this level. While some have endorsed the note, others have expressed much discomfort (non-specific, sadly). Would love to debate, learn & correct, PMs work, thanks!
