Monday, October 29, 2012

Lars Syll — S = I ?


Lars calls upon Simon-Wren-Lewis to provide a simple explanation of S=I.

Lars P. Syll's Blog
S = I ?
Lars P. Syll | Professor, Malmo University

8 comments:

Dan Kervick said...

Actually, isn't the post an extended quote from Wren-Lewis?

Tom Hickey said...

Yes.

Adam1 said...

Lars doesn't say it, but when he says, "A: Savers have an alternative, which is to just keep their savings as money" he is also speaking of money in the sense of financial assets, rigth?

Tom Hickey said...

That's Simon Wren-Lewis being quoted, not Lars.

Professor Wren-Lewis doesn't go into it specifically, but think of it this way. Deleveraging also counts as saving. Say that households net save by paying down loans, and banks, either desiring more liquidity or not having creditworthy customers demanding loans, don't create more deposits through lending, then (absent adds by the government or external sector) the funds from income available for spending by households (consumption) and businesses (investment) will fall, effective demand will shrink, and the economy will contract.

Adam1 said...

I get that Tom (sorry about the miss quote). What I was more pondering was can savings be poured into financial assets versus capital investments? We're awash in financial assets these days but insufficient capital investment.

Tom Hickey said...

IN the accounting sense, S (saving) just means income not consumed or invested, i.e, not spent in the period by households or firms. C means income consumed. I means firm income spent on investment (capital goods and inventory). What can be confusing here is that income in the period includes financing for expenditure in addition to funds earned. It's income drawn forward that must later be repaid from future income.

But "saving" also has the meaning of setting aside for future use. Doesn't matter what type of financial asset is used to save. Financial "investments" are held as savings. This meaning of the term "investment" is different from investment as firm spending in a period.

Jose Guilherme said...

As Marc Lavoie and Mario Seccareccia put it, I (Investment) is the amount that firms spend on factories, machinery, software and the like plus the amount that families spend on new houses.

They duly note that most people speak of "investing" in the stock market or bank account, but this merely swaps one form of financial asset (such as money) for another (such as a share of stock). They thus suggest the use of the French word for financial investments, placements,so as to avoid confusion with the real thing.

Ryan Harris said...
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