On Wednesday, July 19, JAMES C. W. AHIAKPOR wrote: 
 
>Now if households spend more on consumption from their after-tax  
>income, they MUST have less to spend on income earning assets  
>(savings). 
 
(What is logically wrong with the following reply?): 
 
But if they spend more on consumption, whoever they purchase from will have 
rising incomes and so will save more.  Business confidence may be enhanced 
by rising sales and increased investment may take place to meet increased 
demand.  Some of those same households who originally decreased their 
savings to increase their consumption may themselves experience rising 
incomes (say as shopkeepers selling more goods to other households that 
have increased their consumption) and so their savings will rise, perhaps 
to a level as high or higher than before they increased their consumption 
originally. 
 
>With what do investors 
>invest, if not the savings of households? 
 
1. What about the role of credit, modern financial institutions, and 
government policies in decreasing the need to rely on a pool of 'savings' 
to finance investment? 
 
2. What is the percentage of total savings that comes from 'households' 
relative to the amount that is due to corporate retained earnings? 
 
>Elsewhere, I have tried to explain how Keynes could have come up with  
>his argument about the paradox of thrift, still taught in many  
>economics textbooks, but which fails to accord with the workings of a  
>real economy.  It is because he incorrectly included the hoarding of  
>cash in his conception of saving: S = Y - C. 
 
1. This conclusion assumes that hoarding is the only reason that savings 
will not be automatically translated into investment. 
 
2. What about the impact of decreased consumption on business expectations? 
 Are we to believe that when businesses see their sales declining they will 
be encouraged to increase investment just because new savings are 
available? 
 
>That conception  
>makes it easy to divorce saving from the purchase of financial  
>assets issued by investors.  But take a look at World Bank  
>publications and observe the savings rates of different economies as  
>well as their growth performance.  You would find that it is those  
>countries with higher rates of saving which grow faster, not the  
>other way around. 
 
I open the report and I see countries with higher growth rates with higher 
savings and countries with lower growth rates with lower savings.  Which is 
cause and which is effect?  Growth leads to higher incomes leads to higher 
savings seems plausible. 
 
___________________________________ 
 
Mathew Forstater      Department of Economics 
        Gettysburg College     Gettysburg, PA  17325 
 
tel: (717) 337-6668   fax: (717) 337-6251   e-mail: [log in to unmask]