If S increases, C falls (the consumer goods sector shrinks, proportionately). But if all the new S become new capital expenditure the capital goods sector expands (initially - ignoring multiplier effects - by exactly the same $ amount as the consumer goods sector shrimks). Y therefore does not fall. The Paradox of Thrift fails.

The permanent end of the Era of Permanent Financial Crises requires an injunction of biblical proportions: banks that do not lend neither shall they take deposits. Deposits should be held by the Central Bank until a capital expenditure loan is ready to be issued or withdrawls about to be made. The price mechanism (the interest rate on new capital expenditure) - not the quantity of loans - should be allowed to clear the market.         

RL 

----- Messaggio originale -----
Da: "Jérôme de Boyer des Roches" <[log in to unmask]>
A: [log in to unmask]
Inviato: Venerdì, 28 ottobre 2011 18:57:30
Oggetto: Re: [SHOE] S = I?



According to me, in the General Theory , the equation I=S concerns the goods market, not the financial market or banking. It means that the demand for investments goods (I) is equal to the supply of investment goods (S). As I+C=S+C means that the demand for goods (C+I) is equal to the supply of goods (S+C ≡Y). Now, suppose that the propensity to save is increasing (it is the only change in individual decisions), the demand for goods will diminish, just as income, but the amount of saving will not change. Here the functioning of the banking system – granting credit or buying shares through the issuing of IOU or time deposits or bonds - is not concerned. 

Now suppose that the banking system is willing to take more financial risks, the prices of assets will increase, the investment will increase, just as income and saving. 

In my view, for answering to Robert Leeson question, we could have interest to investigate the processes at work between two Keynesian equilibrium, therefore to refer to the Treatise on Money, not the GT. However, in the 1930 book, saving is not defined at equilibrium. 

Best 

Jérôme   


2011/10/28 mason gaffney < [log in to unmask] > 



Roger writes: 
"It is not necessary that the bank hold excess reserves for the effect of 
increased saving to be lost to investment. All that is necessary is if 
reserves are required against relatively inactive time (saving) deposits as 
well as against much more highly active demand (transactions) deposits." 

It seems to me that saving often takes the form of retiring debts. Time and 
demand deposits may flourish, or may fade; a loan can make them, as a former 
loan has made. Legal reserves are not the prime constraint on replacing old 
loans with new, but investment opportunities plus collateral security. Let 
us keep our eyes on the main chance, lurking behind the veil of money. 

Mason Gaffney