Guest Post: The Paradox of Thrift — Debunked

Tyler Durden's picture

Submitted by Gold, Stocks and Forex

The Paradox of Thrift — Debunked

Ever since John Maynard Keynes popularized the Paradox of Thrift, economists, central bankers and politicians have labored under the misapprehension that high levels of savings are bad for the economy and inhibit growth. The Paradox of Thrift simply states: Increased savings means there are less buyers for goods produced, so the nation as a whole will tend to produce less.

  • If an individual saves they increase their wealth;
  • But if an entire nation saves, this causes a shortfall in consumption; and
  • The shortfall in consumption will cause national income to fall.

Keynes was correct in his observation that high level of savings caused a shortfall in national income, but we need to remember that he was writing in the 1930s — in the middle of the Great Depression. His General Theory was published in 1936. What Keynes observed was an anomaly caused by the financial crisis. Falling asset prices threatened the solvency of both individuals and corporations, forcing them to increase their level of savings and — most importantly — use their savings to repay debt.

Not only will national income fall when savings are used to repay debt, but it falls rapidly. The shortfall between saving and new investment (or spending and income) may be small but, like a puncture in a car tire, the result can be disastrous. At each point in the supply chain the leakage is repeated: A receives an income of $1.00 and use 5 cents to repay debt, only spending $0.95. B will receive $0.95 from A, where previously they received $1.00, and will use 5% to repay debt, only spending $0.9025. C will only receive $0.9025 from B but still uses 5% to repay debt, only spending $0.857……… The pattern continues until incomes shrink to the point that parties can no longer afford to repay debt and are forced to consume all of their income. The impact on national income — as evident from the 1930s — can be devastating.

Keynes pointed out that government can break the cycle and make up the shortfall, by spending more than it collects by way of taxes — so that the aggregate level of spending is unchanged. But fiscal stimulus is fraught with dangers, not least of which is the massive public debt hangover faced by the US, Japan and many European economies. I will cover these dangers in more depth in a later post.

Under normal conditions, however, the paradox of thrift does not apply:

  • If an individual saves they will increase their wealth;
  • If the entire nation saves, there is no effect on national income provided savings are channeled through the financial system into new capital investment.
  • All that then happens is less consumer goods but more capital goods are produced — spending as a whole does not fall.
  • Production, as a result, will also not fall.

National income is, in fact, likely to rise. New capital investment will boost productivity and accelerate growth.

Consider the simple example of a farmer who saves and buys a tractor. His overall spending is unaffected. He merely consumes less and spends the proceeds on something else — in this case a tractor. The income of the store that supplies him with consumer goods will decrease, but the income of the dealer that sells him the tractor will rise; the net effect on national income is so far zero. But the farmer now produces more food with his new tractor; so his income — and the national income — increases.

This misconception that the paradox of thrift applies in normal markets has done immense harm to the economy and eroded the savings of the middle-class and retirees. For three generations, central bankers attacked savers by artificially reducing interest rates — in the belief that lower savings would boost demand and stimulate the economy. Low interest rates simply forced savers to assume more risk, in order to earn a return on their investment, and encouraged speculation. The traditional work hard and save ethic that is the backbone of the capitalist system has been supplanted by the consume, borrow and speculate profligacy that got us into such a mess. High levels of public and private debt, inflation, volatile investment returns and rising income inequality are all consequences of the low-interest policy pursued by the Fed. Today’s giant casino is a far cry from the cautious, prudent investment outlook of our grandparents’ generation.

I will conclude by reminding you that:

  • Savings channeled into new capital investment actually boost growth.
  • Savings are only harmful when used to repay debt or other non-productive purposes.
  • Low interest rates encourage speculation and the formation of bubbles;
  • Bubbles cause financial crises; and
  • Financial crises force consumers to repay debt.

….the never-ending circle of life.

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lolmao500's picture

German government source says full parliamentary session to vote on EFSF leverage models on Wednesday

SheepDog-One's picture

Good I hope they vote and present their plan for the bankrupt bailing the bankrupt, and then we can see its another plan that fixes nothing at all.

Sell the news.

Leopold B. Scotch's picture

Through all of this Macro babbling, we need to keep a firm eye on the fact that money in it's current form ain't really wealth.  Stuff is wealth.  Money should be reliable store of wealth, but has not been for a long, long time.

The dollar as a measuring stick for real wealth growth is horribly flawed when the units of said measure have lost any and all discipline required to be reliable, what -- with authorities expanding credit and money supply constantly in good times and bad, only dramatically more so in bad when the bailout's are "needed" to rescue the economy from the prior monetary excess and the damaging mis-allocation of wealth / resources said excess causes.

But to my original point, more units of $$$ applied to a single unit of X, Y, or Z does not give X, Y, or Z any more REAL economic value to an economy.  X has an innate value to Y and Z. 

This whole paradox of thrift and related policies to ward it off, therefore, are mostly flawed in that it all prevents the storing of capital for the creation of more X, Y, and Z, and better yet, improved version of X, Y, and Z that create more efficiencies and more A, B, and C for all the masses.  Instead, capital stores -- the nation's economic seed-corn -- is stolen and redistributed and, generally, put to more highly consumptive or less secure / rational investment purposes.

 

Bicycle Repairman's picture

"[as a result of saving] National income is, in fact, likely to rise."

There you go with that "nation" stuff.  If the "nation" only grows @ 2%, but I need 15%, there's a crisis.  It's so much better to force the serfs to consume all their income or to give them nothing for their savings.  Then I can hit my target and all is right in G-d's kingdom.

The real paradox is that the serfs' saving might crowd out my saving.

trav7777's picture

Whoever wrote the article is an idiot.  They seem to believe that the banks or Fed or economy can magically pay savers a higher yield than the economy itself can generate.

They don't seem to understand where all that magic interest comes from.  The bank pays you a share of what it can earn.  Banks historically did that by lending.  There are simply no takers at higher rates.  Nobody is demanding credit.  The credit base is deflating, which means that loans outstanding are shrinking, things are being paid off, people are cashing out, nobody is going further into debt.  This is a lack of demand for credit, in the aggregate.  So, to try to get more volume, the system has lowered the price of credit, and prevailing interest rates have fallen.  It's really as simple as that.

The temporary bond bubble is simply because those are the only "sure" way to get any nominal principal back.  And the banking rules make all these savings go into the money markets.   USTs are seen as a safer "sweep" vehicle especially after the buck-break lockup we saw in 08.

eureka's picture

Yes - plus ad to your analysis that US Empire itself desparately needs credit inflated sector bubbles to generate nominal GDP growth as substitute for real productivity, export and efficiencies growth - all of which are absent.

Hence, crony capitalism, is the name of the game - a play of short term "gain" for the offshoring & outsourcing executive class and the corrupt politican class - both of whom are in service of the few hundred oligarch billionaires who own virtually everything.

If you want freedom - if you want a republic - you must destroy the empire.

Raging Debate's picture

Right analysis wrong remedy. The empire was like Ghengis Khan's sweeping over the plains conquering everything in its path but no plans to stick around afterward and manage it. That is because the management is toward the official launch of the Chinese reserve currency and domestic growth for them thereafter. It is said a man cannot serve two masters, he will love one and despisethe other.

You don't have to try end the empire, American handed it over to China which is called mandraking and this was a forty year plan. There are risks and uknowns if China would play and they did. But they also did not give full access to their markets if the plan faltered which it is (trade imbalance gap too long causing big dirty patches of creative destruction).

Picture it as expecting gravity and light coming from the sun being cut but unlike the sun, banking is run by imperfect people. So the lag is killing us and Chinese citizens, near literally and soon to be very literally. There are solutions but not without using next generation crop of innovators and thinkers. No worries, us Yanks already built out most of the basic solutions already to gather the information needed to get up and gallop in the West and do it far faster than expected. Careful of attempted murder on the rape victims of the West is needed if we wish limited hostilities vs. glowing heads and eating bugs for a year for ALL

Random_Robert's picture

"The temporary bond bubble is simply because those are the only "sure" way to get any nominal principal back. "

So Trav, what then is the surest way to ensure that you get some of your REAL principle back....?

 

dlmaniac's picture

The surest way is not putting money in the bank to begin with. Interest should not have anything to do with the bank's health. Interest rate is the price of money. If you need money badly then you offer higher rate, if not then a lower one. It's that simple. After that it's up to the savers to decide if the bank is safe enough for the deposit. If not then stay out and let the bank fail so deposit could go to more capable firms to help economy.

CPL's picture

"might crowd out my saving."

 

You meant do, not might.

duo's picture

Debt should only be used for investments that increase productivity.  Debt that finances consumption can be nothing but inflationary.

CPL's picture

debt isn't an investment.

 

It is a hole throwing compounding interest on that and it becomes a hole that no one returns from.

Raging Debate's picture

Good commentary thanks for the time. In late 2013 or 2014 the dollar will be .55 and temporarily pegged to China. It is at this time the masses say hey wait a frigging second, you stole have our real wealth over the last few decades.

Here is where the people of America ultimately decide to scrap the US brand for America 2.0 . Too much stick by financeers to pump Chinese domestic consumption on Americans backs after 40 years of it will mean very, very bad things for the entire world.

The Chinese peg will be launched, sizzle and pop. The cultures have the disadvantage of different value-based legal systems, lack of harmonization also means far more carrot needed to build confidence and I only see sticks in the plans.

If some of you in leadership don't humble yourselves the citizens will be beating you over the heads with those sticks or more literally will destroy already fragile supply chains.

Pegasus Muse's picture

"... money in it's current form ain't really wealth. Stuff is wealth. Money should be reliable store of wealth, but has not been for a long, long time." Which is a good segway for James Turk's latest piece.

=======

The Gold Money Index

By James Turk, Founder & Chairman of GoldMoney October 24 (King World News) – In one important respect, gold is like any other asset. You want to buy it when it is undervalued, and sell it when the opposite is true – when it becomes overvalued. Thus, knowing how to accurately value gold is essential for sound portfolio management.

Because gold is money, its value cannot be measured with the standard techniques used to evaluate investments. Gold is not an investment because it does not produce any cash-flow. It is a sterile asset. Consequently, gold does not create wealth, nor for that matter, does any national currency create wealth. Currency in all its forms – whether fiat or gold – is wealth, held in the form of deferred purchasing power. This store of value function is one of any currency’s most important tasks.

So when the price of gold rises, wealth is just being transferred to people who own gold away from those people holding the national currency being used to report the rising gold price. Wealth is simply being re-shuffled – as I like to say – to its rightful owners, namely, those who choose wisely among the different currencies available in which to hold their liquidity needs. Their wise choice is simply a matter of recognizing which currencies are overvalued and which are undervalued, so they own the latter and avoid the former.

One of the most trusted models that I use to value gold is my Fear Index, about which I have written extensively. Another trustworthy model is my Gold Money Index, which values gold based on its historical role as international money and global numéraire. Here is the formula.

more here: http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/10/24_James_Turk_Report_-_Why_Gold_Will_Go_Above_%2411%2C000.html

Jim Rickards also has a new interview/blog piece up on KWN. Good stuff about how the Fed plays mind games with investors.

Shizzmoney's picture

This misconception that the paradox of thrift applies in normal markets has done immense harm to the economy and eroded the savings of the middle-class and retirees. For three generations, central bankers attacked savers by artificially reducing interest rates — in the belief that lower savings would boost demand and stimulate the economy. Low interest rates simply forced savers to assume more risk, in order to earn a return on their investment, and encouraged speculation. The traditional work hard and save ethic that is the backbone of the capitalist system has been supplanted by the consume, borrow and speculate profligacy that got us into such a mess. High levels of public and private debt, inflation, volatile investment returns and rising income inequality are all consequences of the low-interest policy pursued by the Fed. Today’s giant casino is a far cry from the cautious, prudent investment outlook of our grandparents’ generation.

100% agree.  Where is the INCENTIVE for workers to save?  When corporations (like mine) are starting more-and-more to not match 401Ks (and stiff us on pay/raises that don't keep up with USD inflation rates), or when CDs and savings rates, even at the best of banks and credit unions, don't return a good yield on investment...... where is the consumers' incentive to trust these institutions to do good with their money for their future and their childrens'? 

Never mind the fact that all of the smart people, including the rich, are starting to now to "mattress" their money more and more when they get paid.  People know the bank holidays, the effect of QE3 on our money, the fall of Greece and BOA is coming.  And to be ready, you need cash/gold/silver ON hand, as debit and credit cards go obsolete. 

Harlequin001's picture

100% agree.  Where is the INCENTIVE for workers to save?  When corporations (like mine) are starting more-and-more to not match 401Ks (and stiff us on pay/raises that don't keep up with USD inflation rates),- you might want to consider the other side of that argument when employers are trying to maintain output without laying workers off. It is a fact that it is immeasurably more difficult trying to create a job than to get one...

DosZap's picture

Harlequin001

you might want to consider the other side of that argument when employers are trying to maintain output without laying workers off. It is a fact that it is immeasurably more difficult trying to create a job than to get one...

I agree with you , but their is another side to it.(and ESP is true in times like now,I have many friends still working, doing 80hr weeks, as a rule,this is Japanese style work weeks, the kind that stole you health, mental first, and then physical,this did not turn out well.)

This is where the rub came in, employers(we see it now in full color), are trying to and getting the work of one employee,to match that of three.

When this snowball to hell started is when Corporations started treating employees like chattel.The employees, said to hell with you, and instead of giving there all,started just putting out enough to stay on the payroll.

Coprorate profits are good, because they have eliminated stateside workers as far as they can, and gone over seas.(Thank the gov for most of this).

Harlequin001's picture

I understand your train of thought but I don't fully agree with it. The rot set in when capital became free, or nearly free. Consider this, I as an entrepreneur need to raise capital. I go to savers either directly or through a bank or venture capital fund (same thing) and raise capital from their savings. They want a return on their investment which I can give because I have margin, i.e I can control supply to ensure there is always demand which means my workers are well paid, the quality of life is good. The bank won't finance another similar outfit because it undermines their loan by swamping demand and therefore reducing the profitability of my business.

Under a gold standard I can do this, if I make cars I can sell them locally to a well paid work force because I have margin. Those workers spend money on locally on rents, mortgages etc to people who can also then buy my cars. The community becomes wealthy as a whole.

Under a fiat system the banks or anyone else can now raise unlimited capital to finance a business. being able to offload said debt to a CB for more liquidity  they can now swamp my market and it is here that you are competing with cheap chinese peasants who have no access to capital but are prepared to work for near nothing. Now we have no local wages because the wages are being paid to peasants in China, just a spiral down of quality and then price until no one can afford my goods and the economy is ruined.

It is the fiat system that requires that employers demand 80 hours per week from you, not necessarily greed, though I concede that it may in many instances be both...

Hard1's picture

Totally agree with shizzmoney.  Many people are financially illiterate, but while they still get the reward from buying the latest gizmo, the reward they are getting from their savings is evidently zero nominal or less than inflation.That is a negative incentive to save.

 

In addition, people who do need to save now (tha baby boomers) must be very worried about their shortfall in the new rate environment, so probably ZIRP 4eva is causing that these large and affluent group reduces consumption dramatically in face of the FED's stimulus.  This is beginning to have pernicious unintended effects.

Leopold B. Scotch's picture

While the Fed subsidizes borrowers directly at the expense of savers.

trav7777's picture

dude, there is NOBODY out there looking to borrow at 6%.  Or 5%.  The economy cannot generate that ROI.

If you want yield, put your money in Brazil or somewhere that IS capable of growing at that rate.  Stupid savers who cannot figure out how to chase yield (with extra risk) and stamp their feet and INSIST the bank just magically pay them 6% for zero risk...fuckem.

Snidley Whipsnae's picture

trav777... "If you want yield, put your money in Brazil or somewhere that IS capable of growing at that rate."

I don't see how the BRIC economies will continue to generate high ROI if the Western consumption economies are slowing. Granted, in the long term internal consumption in BRIC economies will lessen the need for exports, but they are not there yet.

Of course, there are many risks associated with investing in anything, including the possibility of capital controls, trade barriers, wars, etc, that can catch one out. Chasing cross border investment returns is no sure fire lead pipe cinch of 6% or better returns...except maybe in the very short run.

I believe the entire world is entering a period of credit contraction and that finding any asset that will retain purchasing power is a good investment...and I own no gov treasury issues.

AnAnonymous's picture

Granted, in the long term internal consumption in BRIC economies will lessen the need for exports, but they are not there yet.

///////////////////////////////////////////////////////////////////

They are very unlikely to reach that stage.

To develop a higher and higher consumption level, they will need to import everything and anything, especially commodities.

Who has the commodities market ticket entry? The US and it is called the USD. And that is a US monopoly. Cant get them without messing with the US in one way or another, directly or indirectly.

Not possible for them to rise their internal consumption level in any drastic manner as it would take to maintain or increase US consumption.

World is kicking the bucket supporting the US. etc

Key word: US world order. Nothing happens anywhere without the ganglord, the US, knowing of it and allowing it.

Snidley Whipsnae's picture

"Who has the commodities market ticket entry? The US and it is called the USD. And that is a US monopoly. Cant get them without messing with the US in one way or another, directly or indirectly."

China has developed trade agreements with Brazil, Russia, and others to settle cross border trade in their local currencies. I expect a continuation of this process as the US economy, and eventually the military, weakens. There is nothing to prevent Iraq from voiding contracts with US oil companies and negotiating contracts with other foreign oil companies when the US military exits Iraq. Iraq, as a soverign, simply states that the contracts negotiated with US oil companies were made under duress.

The USD isn't going away immediately but neither did the British Pound.

All purely fiat currencies have ~ 40 yr lifespan. Are you saying 'this time it's different?'...

 

AnAnonymous's picture

BRIC are BRIC. Agreements on consuming each other wont lead them no further than if they consume themselves. Just a different load distribution.

But what? They can only progress by consuming their exterior. No, cant do. US has the key to paradise.

Iraq as a sovereign? The US knows the job in installing puppet governments. Like telling Saudi Arabia could void US contracts, stop using USD etc...

Look at Saudi Arabia, it has become such a lap dog for the US they are compelled to do the US wet work.

Snidley Whipsnae's picture

"US has the key to paradise."

You keep believing that...Let me know how it works out.

Empires come and empires go. You should spend some time reading real history and less time watching main stream media. The US is subject to the same list of missteps that brought down all previous empires. I would enumerate them but believe you should read some history and then you will learn for yourself... far more convincing than a short post on ZH.

 

Random_Robert's picture

"I don't see how the BRIC economies will continue to generate high ROI if the Western consumption economies are slowing. Granted, in the long term internal consumption in BRIC economies will lessen the need for exports, but they are not there yet"

 

 

-Interesting point, and it exposes that fact that there are no "risk free" growth oriented stories out there today...

so, if making a nominal 5-6% is your goal, then you are pretty much stuck with either:

1) chancing it with the BRIC's

2) Chancing it by trading your own portfolio in the FOREX, bond, or equity markets

3) Chancing by assuming that the printers will keep printing, and that real assets will preserve your purchasing power, while generating the required nominal 5-6% along the way...

People fail to see that you can have a nominally inflative monetary enviornment sitting on top of a real debt-deleveraging sentiment, and the end result in real terms will be deflation; and there is not a single nominal price of ANYTHING would be an accurate indicator of what's going on...  In this scenario, he who loses the least purchasing power, wins.

 

Nick Jihad's picture

If you are a boomer, the ZIRP is a powerful incentive to save. Anyone with elderlyrelatives knows that living off the interest from savings is now impossible. I conclude that if I wish to have a dollar to spend when I am old, I will have to save that dollar now, so I have cut back spending dramatically.

Clearly many others in my generation are having this same thought, but  TPTB prefer to pretend that we are all to stupid to draw this obvious conclusion.

Raging Debate's picture

Shizz. Yes, final devaluation period in 2013 followed by political panic. It isn't set in stone for more printing afterward for hyperinflation. But for bank holiday period this may last six months credit cards may work, we'll see. The rate of business has increased. For back-up supplies I prefer raw commodity imports like sugar to store for barter. PM's are really for preserving purchasing power past a hyperinflation event. It will be taxed when repatriated no doubt to finish recapitalizing the banking system. But that doesn't mean at all I discourage PM's. I mentioned the sugar because most of the folks reading this can't afford gold.

As for myself, I stored my wealth in intellectual property utility as a means to produce income and it can only be stopped if their is no Internet anywhere on earth. There is no risk-free way of preserving wealth just slightly better methods of loss mititagation. Even oligarchs are not safe in near the end of a Fascist cycle.

DosZap's picture

Shizzmoney

Agreed, also where is the incentive to SPEND?

There is NONE.

Gov/Fed moves and job insecurity have people scared spitless to do anything except spend only what they need to,very little flagrant excess spending, by those that have decent jobs,or a job of any value at all.

ivars's picture

Of course human nature has not changed and protestant ethics existed somewhere sometime- but not in the USA...

I think I finally managed to match them! Of course, crash (mimicking recession in q1 2012 in the USA and probaly worldwide) is there for all to be seen:

Now I have a really superb forecasting /history study interest tool . Have a look at exercise behind matching GREAT DEPRESSION and GREAT RECESSION timelines for the first time ( once  I managed to patternalize ( ?) OUT FED's grip on USA stock market prices)  and, as usual, better visibility charts plus explanations here:

http://saposjoint.net/Forum/viewtopic.php?f=14&t=2626&p=34732#p34730

And here:

http://saposjoint.net/Forum/viewtopic.php?f=14&t=2626&p=34732#p34732

The supplement chart for rereading the history of GREAT DEPRESSION and rethinking the future as time line can be extended as well:

http://farm7.static.flickr.com/6055/6273870574_8de9d22b08_o.png

http://farm7.static.flickr.com/6217/6273870954_52bd042a99_o.png

http://farm7.static.flickr.com/6232/6273871980_62a22ec234_o.png

mess nonster's picture

Props Ivars- you've definitely found a correlation of peak to peak and trough to trough.  (Seems to me such a correlation speaks more to the madness of crowds than anything else) The only major difference will be when today's chart plunges all the way to literal Great Depression levels. That will be quite the anomaly!

DosZap's picture

Ivars,

Of course human nature has not changed and protestant ethics existed somewhere sometime- but not in the USA...

I do not agree, if you were in the US on a typical Sunday morning, the churches are still full of Protestants, that have ethics and practice them, I am one.

Protestants and their ethics is what built this country, our first textbook in this country was the Bible.

In the Depression, people would ask for work, hated handouts and only took them when no choice was to be had.

When I was growing up these same ethics applied, If a man does not work, he does not eat.

Why?,self esteem and ethics,from what?,Protestantism.(and other Christian Religions).

Snidley Whipsnae's picture

doszap... please, we have more than enough revisionist historians and propagators of mythology running around spreading disinformation.

Do you really believe that all the homeless holding up 'will work for food' signs at interstections really want to work? Or, do they want a couple of bucks for food/drink?

Were the Salem Witch Hunts caused by the 'first protestants in America' reading their textbook, the bible?

Religion is supported by the State because various religions help keep the sheeple in line.

...and, when no other reason exists for starting a war, the State can always call on differencies of opinion about who's god is the best.

I could go on but you get the gist... This is not a site to discuss religion or your particular religious bias.

AnAnonymous's picture

Of course human nature has not changed and protestant ethics existed somewhere sometime- but not in the USA...

////////////////////////////////////////////////////////////////

No. Human nature is no constant.

What has not changed, the US citizens nature, which is eternal.

LawsofPhysics's picture

Still fighting for the infinite growth and production model on this finite world eh?  Good luck with that.

snowball777's picture

Ssshhh...you'll contaminate the experiment and we'll never be able to trust the results.

 

tarsubil's picture

Hi, I never signed a consent form and I would like to opt out. Thanks!

mayhem_korner's picture

 

 

Savings are deferred consumption, but fail if the real return is negative.  The spread between the intoxicating projected real return relative to interest rates at the time of investment and the actual return of invested capital based on market valuation, including bubble effectsleads to the insurmountable debt gap.  

Too many go "all in" on the former, not realizing that the predictable overinvestment leads the latter.  And so spawns Bagholder Nation.

LawsofPhysics's picture

Just call it for what it is, a ponzi.

mr_sandman's picture

"The pattern continues until incomes shrink to the point that parties can no longer afford to repay debt and are forced to consume all of their income."

 

Yes, but this "pattern" only is due to the fact that the credit expansion was fraudulent in the first place.  No one would claim that Enron was a "pattern" that should be saved because there would be a self-reinforcing spiral making that entity insolvent.


Keynes was wrong even in the context of the Great Depression, because it is impossible to grow real products with capital that consists of IOUs.  It would be like Aesop's fable with the ants and the grasshopper in the winter.  The grasshopper gets to the storehouse and realizes there are lots of IOUs that say "here is some food."  It doesn't matter if there's some mathematical death spiral that results from "deflation" or "deleveraging" when he realizes this, the aggregate quantity of capital (e.g. food) in the storehouse simply does not exist in the physical world and no amount of accounting wizardry can alleviate this.

LawsofPhysics's picture

Bravo!  Now if only eCONomists, economics, and monetary policy actually cared about the real world.  hedge accordingly.

trav7777's picture

YES!  Excellent analogy; I am going to use that in the future.

And that is PRECISELY why deflation in the quantity of IOUs in such an edge case does NOT lead to more worthful IOUs.  They are themselves bankrupt as an institution and must be discounted.

Raging Debate's picture

Yep. Bonholder haircuts galore, country by country. Europe first, America second, China third and least cut. From a citizens stand-point of suffering, eating a huge shit sandwich and getting it over with in 2008 wpupd have been better. For bondholders, it is better to wait. One holds the capital and assets. Gee, what's happening Beave?

i-dog's picture

"supplanted by the consume, borrow and speculate profligacy"

I contend that this was caused by the welfare state, not by interest rates. Instead of the old saw of "save for a rainy day", the socialist meme of "vote for us...we'll look after you" introduced a moral hazard.

This is what caused the SKI generations: Spend the Kids Inheritance ... they won't need it!

Fucking socialists fail again...then blame it on capitalism!

Waterfallsparkles's picture

I will not be spending my Children and Grand Childrens Inheritance.

I worked very hard to build what I have.  I did it so that my Future Generations will have a better life and just maybe will be able to graduate from the Middle Class into the Upper Class.  Money wise.

As it takes Money to make Money.  So, if I have shown them diligent money principals and leave them Money or Assets they will have a chance to use those Assets and Money to grow it into even more Money.

There are 3 was to make Money.

1. Is to Work for Money.

2. Is to have Money Work for you.

3. Is to have People Work for you.

Combine all three and you will be above the Middle Class.

trav7777's picture

#2 is no longer viable in the aggregate.

Bwahaha WAGFDSMB's picture

#2 was never viable in the aggregate.  Finance is zero sum.  If someone is collecting interest, someone else must be paying it.

Raging Debate's picture

True Trav but low hanging fruit exists and I'm aggregating smaller investment just fine now (recent 90 day activity). But this is very unsexy and far more tedious than what most investors are used to with index investing. LOG = Low organic growth. If your not already very well connected go out and do some research and grab some low hanging fruit. Lots of established foreigners around now with small pockets of cash and are very itchy to invest. You'll just have to learn a few of their customs to close deals. That is one opportunity. There are some others but I am not going to just sit and gripe about no opportunity.

Someone mentioned Bakken the other day. While we all heard we're all going to die from Peak Oil, thousands of miles of pipeline was being built. Since few ever heard about the opportunities Bakken provides, why don't some of you build or expand a service that finds these kinds of opportunities? Then hire a couple of people part-time ;)

Waterfallsparkles's picture

trav7777,

#2 does still work if your Money is in Investment Real Estate.  Most Property's will give you at least a 5% sometimes 8% or more return on their value.