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LA Times: Obama stimulus spending: $246,436 per new job

Saving is good for the individual, but not for the economy as a whole.

People try to save more and therefore they spend less. Investment in the economy decreases.

This would not be a problem if credit was flowing smoothly, since saved money would be reinvested by the bank, however, credit has become harder to come by because of circumstances already described, this means there really is money being saved that is not being reinvested in the economy.

The economy as a whole is trying to sell more to save money and buy less, this creates a drop in demand. The drop in demand leads to a drop in revenues for comanies, downsizing, and unemployment. This means lower incomes, lower prices (deflation), and in turn less economic activity and even more saving. Possibly why banks are even more warry to lend right now.

You realize the fault in this don't you? It would mean that if one person gets fired, that demand would drop, so pay would go down by that amount. This would start a spiral whereby at the end no one works. But it doesn't work this way. Why?
 
You realize the fault in this don't you? It would mean that if one person gets fired, that demand would drop, so pay would go down by that amount. This would start a spiral whereby at the end no one works. But it doesn't work this way. Why?

I suppose there is always foriegn investment. We don't live in a box. The government could take on defecits because of this. Companies will be invested in from abroad. Also people will take risks, and some may pay off.

I am sure that a growth in productivity during most recessions, or the invention of new technologies would also work against the creation of a never ending spiral.

Certain products will not have the demand drop as much as others as well. Certain commodities, mostly necessities, I am sure will not have a drop in demand regardless.
 
Then what is the problem with the increased savings?

Increased savings is not the problem.......

Increased savings during times of decreasing incomes is a problem.
 
A lot has to do with our current situation. Not all recessions will result in a paradox of thrift. Not all are liquidity traps. It just happens to be that this one does fit those descriptions.
 
I suppose there is always foriegn investment. We don't live in a box. The government could take on defecits because of this. Companies will be invested in from abroad. Also people will take risks, and some may pay off.

I am sure that a growth in productivity during most recessions, or the invention of new technologies would also work against the creation of a never ending spiral.

Certain products will not have the demand drop as much as others as well. Certain commodities, mostly necessities, I am sure will not have a drop in demand regardless.

Some things actually see an increase in demand during recessions. You have to stop looking at aggregates because it blinds you to what is actually going on: shifting demand.
 
Increased savings is not the problem.......

Increased savings during times of decreasing incomes is a problem.

Because when credit is hard to come by we should stop saving and make credit even harder to come by?
 
A lot has to do with our current situation. Not all recessions will result in a paradox of thrift. Not all are liquidity traps. It just happens to be that this one does fit those descriptions.

So then a liquidity trap is responsible for the recession, and we should increase liquidity to get out of it? Explain then the early 1920s recession and why we got out of it even though we did the opposite of what we're doing now.
 
Because when credit is hard to come by we should stop saving and make credit even harder to come by?

Another typical time frame error. Increased savings broadens long term credit availability. As dictated by reality... increased rates of savings during periods of decreasing income does not boost short run credit availability.
 
So then a liquidity trap is responsible for the recession, and we should increase liquidity to get out of it? Explain then the early 1920s recession and why we got out of it even though we did the opposite of what we're doing now.

The 1919 recession was an after effect of WWI. A bad comparison if you ask me; a much more quality comparable one would arise only 9 years later (and central bankers adhered to the bold). What was the end result?

P.S.

The Keynesian remedy to a liquidity trap is to boost demand, as monetary policy is rendered ineffective FWIW....
 
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Some things actually see an increase in demand during recessions. You have to stop looking at aggregates because it blinds you to what is actually going on: shifting demand.

The bold signifies some pretty harsh language. Ignoring economic indicators is never a good idea regardless of whether or not they adhere to your particular liking.
 
Another typical time frame error. Increased savings broadens long term credit availability. As dictated by reality... increased rates of savings during periods of decreasing income does not boost short run credit availability.

How does it not? If I'm an individual, the more I have, the more I can lend, short-term and long-term. What changes with a corporation?
 
The 1919 recession was an after effect of WWI. A bad comparison if you ask me; a much more quality comparable one would arise only 9 years later (and central bankers adhered to the bold). What was the end result?

P.S.

The Keynesian remedy to a liquidity trap is to boost demand, as monetary policy is rendered ineffective FWIW....

Wait what? Central bankers at the onset of the Great Depression adhered to not increasing the monetary base? Why do you ignore what they were doing right before everything started going to hell?
 
The bold signifies some pretty harsh language. Ignoring economic indicators is never a good idea regardless of whether or not they adhere to your particular liking.

It's not about ignoring it and it's not about my liking. Sure, it's good to look at it, but you can't just only look at it. During a war GDP is probably growing, but it's still a crappy time to live in.
 
How does it not? If I'm an individual, the more I have, the more I can lend, short-term and long-term. What changes with a corporation?

Savings has been increased as income has simultaneously decreased. We can make all sorts of arbitrary comments about having more, but it is helpful to refer back to Friedman's permanent income hypothesis; people will desire to buy more/take out credit if their future income expectations is favorable.

You want lending to increase? It is absolutely essential that we boost demand!

Besides, what has the reality of the current situation told us? Savings has increased quite a bit, while lending... not so much.
 
So then a liquidity trap is responsible for the recession, and we should increase liquidity to get out of it? Explain then the early 1920s recession and why we got out of it even though we did the opposite of what we're doing now.

I don't think that recession can be classified as a liquidity trap.

Goldenboy219 said:
The bold signifies some pretty harsh language. Ignoring economic indicators is never a good idea regardless of whether or not they adhere to your particular liking.

For the big picture I would agree with you. However, since obvouisly the entire economy has never been completely dismantled by a deflationary spiral, I am guessing something must break the chain. Possibly it is because not literally everything sees a drop in demand, despite a drop in AD. When looking at the macro level you need to be wary of the fallicy of composition, but also the fallacy of division.
 
I don't think that recession can be classified as a liquidity trap.

So everything before the Great Depression was not a liquidity trap? That's convenient.

For the big picture I would agree with you. However, since obvouisly the entire economy has never been completely dismantled by a deflationary spiral, I am guessing something must break the chain. Possibly it is because not literally everything sees a drop in demand, despite a drop in AD. When looking at the macro level you need to be wary of the fallicy of composition, but also the fallacy of division.

Exactly. An economy does not just collapse on its own.
 
Savings has been increased as income has simultaneously decreased. We can make all sorts of arbitrary comments about having more, but it is helpful to refer back to Friedman's permanent income hypothesis; people will desire to buy more/take out credit if their future income expectations is favorable.

You want lending to increase? It is absolutely essential that we boost demand!

There are still companies making money out there though. When credit is hard to come by, they will get the loans while the companies that aren't will have a much harder time of it. This speeds up the loss function, which is essential for an economy. The faster the losses the faster the correction.

Besides, what has the reality of the current situation told us? Savings has increased quite a bit, while lending... not so much.

I've gone over this with you. 17x some arbitrary level means nothing. If the reserve ratio gets to 100% and there's still no lending then there may be a problem with what I'm saying.
 
So everything before the Great Depression was not a liquidity trap? That's convenient.

No, just not that recession. Interest rates were never close to zero during that time, they were actually high. The 1919 recession is similar to the one in the early 1980's in my opinion.
 
There are still companies making money out there though. When credit is hard to come by, they will get the loans while the companies that aren't will have a much harder time of it. This speeds up the loss function, which is essential for an economy. The faster the losses the faster the correction.

I am not so sure. It would seem to me it would just make faster losses. Not necesarily a faster correction.
 
No, just not that recession. Interest rates were never close to zero during that time, they were actually high. The 1919 recession is similar to the one in the early 1980's in my opinion.

Do you know what the plan of action was for the government during those recessions before the Great Depression?
 
I am not so sure. It would seem to me it would just make faster losses. Not necesarily a faster correction.

If you're making money you can still get loans right? But if you're not, then loans will be harder to come by. These loans would otherwise keep these companies afloat but now they will just fail faster if they can't get credit. This will help shift production toward what people are really demanding.
 
For the big picture I would agree with you. However, since obvouisly the entire economy has never been completely dismantled by a deflationary spiral, I am guessing something must break the chain. Possibly it is because not literally everything sees a drop in demand, despite a drop in AD. When looking at the macro level you need to be wary of the fallicy of composition, but also the fallacy of division.

Regardless of recessions/depressed economic sentiment, there are aspects of our lives that are essential. Health care, waste disposal, death expenses, etc... are quite inelastic, meaning price volatility will have minimal response in regards to quantity demanded.

Other aspects such as food, entertainment, transportation, etc... will be hit harder. Suffice to say, discretionary spending falls when income uncertainty arises.

Of course, we could tie this together in a much neater package by referring to cross price elasticity of demand, but i am not sure talking economics will go over very well;)
 
There are still companies making money out there though. When credit is hard to come by, they will get the loans while the companies that aren't will have a much harder time of it. This speeds up the loss function, which is essential for an economy. The faster the losses the faster the correction.

My issue is in the bold. Volatility has to be considered, and faster losses leads to the unleashing of animal spirits. Psychology and heuristics then render market actions inefficient as panic (quite the contagious ****) begins to spread.

I've gone over this with you. 17x some arbitrary level means nothing. If the reserve ratio gets to 100% and there's still no lending then there may be a problem with what I'm saying.

This is just a misunderstanding of basic finance. High levels of reserves is essentially a major symptom of a liquidity trap. BTW: 17x equates reserve ratio's at 170%:2wave:
 
My issue is in the bold. Volatility has to be considered, and faster losses leads to the unleashing of animal spirits. Psychology and heuristics then render market actions inefficient as panic (quite the contagious ****) begins to spread.

Not everything fails though. You know this.

This is just a misunderstanding of basic finance. High levels of reserves is essentially a major symptom of a liquidity trap. BTW: 17x equates reserve ratio's at 170%:2wave:

Of what is legally required.
 
If you're making money you can still get loans right? But if you're not, then loans will be harder to come by. These loans would otherwise keep these companies afloat but now they will just fail faster if they can't get credit. This will help shift production toward what people are really demanding.

And to think that you might not want to talk economics;) To my surprise (even though you are probably unaware), cross price elasticity arises! Must be a good time for bankruptcy attorneys; as demand has clearly shifted in their favor.
 
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