What are savings?

FOFOA has taken some flak for this comment in the post Focal Point: Gold
Money is debt, by its very nature, whether it is gold, paper, sea shells, tally sticks or lines drawn in the sand. (Another shocking statement?) Yes, even gold used as money represents debt. More on this in a moment.
Critics point out that gold extinguishes debt. However, unless the end user wants to make jewelry out of the gold, it represents a claim on production and/or assets in the economy. In a purely fiat currency system, where sea shells or paper dollars are money, but the system has no debt, you can't loan paper dollars or sea shells, you can only swap them for goods and services. In this system, if you sell a chicken for sea shells or dollars, what do you have? You have a claim on your neighbors production or assets to be used at some time in the future.

On his blog, FOFOA argues that people do not want to hold paper dollars for very long because the supply increases over time. Therefore, we can split the function of medium of exchange and wealth preservation. You will hold paper dollars when you want to transact, but you will shift your savings into something that does not have a rapidly increasing supply—gold. In a sense, this gold represents the world's debt to the holder. The holder of gold has foregone consumption of goods and services today and taken gold to preserve the value of their foregone consumption.

Here's an article by Frank Shostak which explains savings and its role in the economy.

Only savings can create wealth
The more sophisticated and productive a particular economy is, the more stages of production it will have. Conversely, the fewer stages of production an economy embraces the less wealth it can produce. For instance, with bare hands an individual who is alone on an island could pick up 25 apples per hour from an apple tree.

By means of a special stick his hourly output could be raised to 50 apples. If the stick would have been readily available our individual could have raised the output of apples immediately.1 If, however, the stick is not available, it must be made. The making of the stick takes however time. Implying that while previously (i.e. without the stick) apples could be picked up immediately, now it takes time before apples could be picked up. Since now, he first have to make the stick before it can be employed in picking apples.

With a more sophisticated equipment it would be possible to raise the hourly output of apples further. However, this will require to invest much more time in making this equipment. In other words, although a more sophisticated production structure will enable a greater output, the waiting time will increase. Adding new production stages lengthens the production structure i.e. the time elapse between the beginning of the production process and its turning out a product ready for consumption increases.

What makes it possible to add new stages of production is the fact that various individuals who are engaged in the making of the stages are supplied with goods and services necessary to sustain their lives and well being. In other words during the period of building new stages those individuals must be sustained-they require means of sustenance and thus access to the pool of means of sustenance or the pool of funding.( In the case of our individual on the island, the pool of funding will consist of saved apple that will sustain this individual while he is engaged in making the stick). Without the pool of means of sustenance or the pool of funding, no economic activity can emerge. On this Menger wrote:

"Needs arise from our drives and the drives are imbedded in our nature. An imperfect satisfaction of needs leads to the stunting of our nature. Failure to satisfy them brings about our destruction. But to satisfy our needs is to live and prosper. Thus the attempt to provide for the satisfaction of our needs is synonymous with the attempt to provide for our lives and well-being. It is the most important endeavours, since it is prerequisite and foundation of all others".2

The size of the pool of funding determines whether a more sophisticated equipment could be introduced 3. For instance to build sophisticated equipment to pick up apples requires one year of an individual work.

However, if the pool of funding is the only means of sustenance to sustain this individual for one month, obviously it will not be possible to build this sophisticated equipment. Implying that it will not be possible to increase the output of apples. The pool of funding therefore, sets a brake on the use of the more productive but longer stages of production.

Individual's time preferences, as manifested by the pure rate of interest, determines how much of a given flow of real wealth is allocated towards consumption and how much towards savings, and hence towards the pool of funding. Lowering of time preferences i.e. lowering of the pure rate of interest, implies that people are now willing to wait for any given amount of future output.4 Implying that they are ready to allocate proportionately more of the means of sustenance towards longer stages of production. A rise in the time preferences and in the pure rate of interest means that people are less willing to wait.

This means that they will allocate proportionately more of the means of sustenance towards the immediate production of consumer goods and less towards the longer production stages. The pure rate of interest fulfills the crucial role of coordinating between the length of the production structure and the pool of funding.

The introduction of money will not alter the essence of the analysis we have presented so far. Money now, will offer not only the services of the medium of the exchange but also the means of savings. In a world without money individuals would encounter difficulties in saving perishable goods. The introduction of money resolves these difficulties. Instead of saving i.e storing perishable goods, now people can save money.

However, to fulfill the role of the medium of the exchange and the means of savings, the money stock must remain unchanged. This will guarantee that production will precede consumption. It will also guarantee that money is fully backed up by the means of sustenance. Thus, whenever a producer exchanges his goods and services for money he acquires a permit to access the pool of funding whenever he requires it.

By exchanging his goods for money he enables the buyer of his goods to engage in production, thereby allowing the overall production flow to stay intact. It is this uninterrupted flow of produced goods that provides the full backup to money. This means that whenever a producer decides to realize his money i.e. to exchange them for goods and services he will be able to find these goods.

What, however, enables this uninterrupted production is the continuous flow of saved goods i.e it is the saved means of sustenance that permits the ongoing expansion in production of wealth. Note, that while the pool of funding consists of real goods and services i.e. means of sustenance, it is expressed or denoted in terms of money. The existence of money, so to speak, enables us to grasp the existence of the pool of funding.

Money, however, does not create this pool. Nevertheless, one could argue that money supplies services like any other good and therefore it must be part of the pool of funding. Contrary to other goods the increase in money cannot improve on the services it provides. On the contrary it will only dilute its purchasing power and cause wealth destruction. With regard to the increase in the quantity of other goods this will raise benefits to humans. Consequently we can conclude that money is not part of the pool of funding. (An increase in the money stock will not enlarge the pool of funding).

Trouble erupts whenever the banking system expands the money stock i.e. creates money out of "thin air". For this increase in the money stock gives rise to the consumption of goods which is not preceded by production. It generates exactly the same results as the counterfeit money. For under these conditions the buyer of goods does not use them to support his own production. In fact he consumes and produces nothing. Consequently the buyer of the money/or seller of goods can never realize his money, for the means of sustenance to support these newly created money was never produced. Any attempt then, to lengthen the production structure by means of an expansion in the money stock must always fail.

In other words the expansion in production of goods and services requires an expanding pool of means of sustenance. Printing money which boosts consumption, doesn't cause more, but rather less means of sustenance. If the increase in money would permit to lengthen the production structure, then it would imply that money can be a substitute to the non existent means of sustenance.

It is accepted by some economists that although loose monetary policy impairs wealth formation, it nonetheless can lift the total level of economic activity. However, every activity regardless of its nature i.e. whether it is a wealth or a non wealth generating activity, must be funded. In other words people who are engaged in these activities must have access to a means of sustenance.

Without a means of sustenance no activity can emerge. A given pool of funding can only sustain a given level of activity. Now, if a larger percentage of funding is diverted, as a result of a loose monetary policy, towards non-wealth generating activities, less funding will be left for wealth-generating activities, overall activity however will remain unchanged. In order to raise overall activity i.e. to lift production of goods and services, it will be necessary to make the production structure more productive.

This however, will require a lengthening of the average time between the beginning of the production process and its turning out a product ready for consumption. This, however, will require more means of sustenance. Since money cannot be a substitute for the means of sustenance it therefore cannot make the production structure more productive and thus raise the level of economic activity.

A view that a loose monetary policy could lift the level of total activity presupposes that monetary pumping somehow creates funding. If this were the case then loose monetary policies around the world would have eradicated poverty a long time ago. Now, as long as the pool of funding continues to expand, government loose monetary policies give the impression that they can lift the total economic activity. That this is not so becomes apparent once the pool of funding is stagnating or shrinking.

Most mainstream economists who advocate monetary pumping and the artificial lowering of interest rates in order to counter recessions, totally misconceive that the interest rate is just an indicator. It is just a manifestation of the demand versus the supply of savings. Being a manifestation it cannot substitute the non existent means of sustenance and grow the economy as suggested by mainstream economists. Again what is needed for economic growth is an expanding pool of funding.

1. Murray N. Rothbard, Man, Economy, and State (Los Angeles:Nash) vol. 1 p 42.

2. Carl Menger, Principle of Economics, New York University Press, p77-78.

3. Richard von Strigl, Capital and Production, translated by Margaret R. Hoppe and Hans H. Hoppe Ludwig von Mises Institute p 8.

4. Murray N. Rothbard Man, Economy, and State (Los Angeles: Nash), vol. 2, p488.

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