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Does saving finance investment? (importance of saving)

Hello, Cullen,

I'd like to ask you your opinion on the subject of savings and investment.

It is very common for economists to view savings as something critical for economic growth, arguing things like (1) "savings finance investment and since investment is key for long term growth, increasing saving is important", (2) "lack of domestic savings means one must run current account deficits in order to finance investment" or (3) complaining about low household savings rates and how governments should incentivize savings as opposed to consumption. I assume they're talking about financial saving.

However, this whole subject confuses me. I assume most of the "savings finance investment" economists assume banks intermediate savings from lenders to borrower, which would make the sentence kind of true, but under endonegous money financing investment through bank loans would not require any previous saving, rendering much investment independent of savings (from my analysis, capital market financing would in fact require someone to save, as opposed to bank financing, right?). In fact, some sources (see end of post paper from the IMK, for instance) argue that encouraging saving just for the sake of saving can actually be counterproductive by decreasing economic activity through the fallacy of composition and that instead of saving preceeding investment, investment is financed regardless of saving (through credit) and then adds to aggregate saving (with saving here including both financial and real saving).

Therefore, I'd like to know what you think of the subject, which to me is very confusing. Does or can saving finance investment? Is more saving good? Does a lack of domestic saving imply having to borrow from abroad? Do government deficits crowd out private investment by "stealing" available savings from it? Is a low household saving rate worrysome?

So many questions... Any input would be appreciated!

Thank you very much!


"Saving does not finance investment: Accounting as an indispensable guide to economic theory", IMK:



That is a very excellent paper. It covers the topic nicely.

The way to think of this is that investment is the endogenous factor in the economy that makes everything sustainable. So, for instance, if I spend $100K to build a house and I finance that investment from borrowed money then, after I repay the loan our financial balance sheets are in the exact same position they were before the house was built, BUT we have a new $100K asset in our economy. This house might produce income for me or it might appreciate in value or I might use it to collateralize new loans, etc. So, we spent on investment in the house and now we are richer because of it.

Of course, you can also spend from existing savings to finance the investment in the house, but the key point is that that existing savings was also created endogenously at some point. It didn't come from some existing pool of loanable funds. It was previously created from some other person who borrowed that money and it is sustainable in large part because at some point along the way that money was used to finance investment.

So, the key point is that wealth AND money creation are endogenous in our economy. They are created from thin air. They don't come from some existing pool of funds that someone saved.

I hope that makes sense.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Thank you very much for the reply, Cullen,

It does make sense. By "existing savings created endogenously at some point", you mean that even if I choose to finance the $100K house by drawing down on my savings instead of borrowing, those $100K I hold in the bank as deposits and use to buy the house were created by previous credit creation, correct?

If it's not too much trouble for you to elaborate, and to better understand your perspective on this subject, what would be your reply to some economist arguing that more saving would be benefitial for the economy? Would you agree with it and why?

Thank you once again.


Right. All financial assets were created endogenously at some point and the financial system operates much like an endlessly growing human body constantly creating new output and leveraging newer output on top of old output. So, I borrow $100, build a house, repay my loan, and then collateralize my house to build a new $110 house. And on and on. That's basically how the entire economy works.

The problem with saving is that it creates a paradox of thrift. If we have $100 in financial assets and $100 worth of spending in period 1 and then I save $90 in period 2 (spend on $10) then our economy only has $10 of spending in period 2. We are 90% lower than we were in period 1.

This is why investment is so important. Investment allows us to spend AND save. So, when I build that $100 house in the first example I spent on investment so even when we repay the loan we have $100 less of financial assets but I still have $100 of non-financial assets.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Yes, currently all money is endogenously created, that is from within the economy, by banks creating money out of thin air.  As you point out, banks are never intermediaries - they create the money they need in order to collect interst profits and satify responsibility to share holders.

People often look at the way things are done and assume, because they are done this way, they must be done this way - oblivious to the fact that our money system is contrived, not a law of nature.

If saving is done defensively, out of insecurity about the future, it can be deleterious to the economy.  The extreme case would be keeping money out of circulation, under the matress.  This is clearly happening today where money is squirreled away for retirement - not only is there no safety net, but for many Americans, quality of life will diminish significantly in retirement.  So money gets hoarded in the stock market, which is out of the GDP calculation, and the economy is starved for the money it needs.

Endogenous credit based money isn’t an option. It will ALWAYS exist. It existed before banks and it will exist after banks because it is nothing more than a maturity transformation agreement. I want 10 seeds today so I write on a piece of toilet paper to borrow 10 seeds from my neighbor with the agreement to give him 11 seeds next season. That’s all this is. It happens all the time in banks and outside of banks. You literally can’t avoid it because it’s just a contractual term of trade that is inherent to any economy.

Paul, I really think you don’t understand this topic as well as you think you do. I would suggest studying it MUCH more. Don’t take that personally, but this is one of several comments you’ve made in this forum that display a rather basic misunderstanding of endogenous money.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

(Late) thank you for the replies to these post.

So you don't think low levels of household saving are problematic? For some reason the UK and the US often rank as economies with low levels of household saving, but that doesn't seem to hurt their economic performance compared to other countries with higher levels of household saving (Germany, China, many other emerging countries) which may also have good economic performances. Yet, the argument in favour of more saving and more spending in the first and second group of countries, respectively, keeps showing up.

I think that in many cases, savings can lead to longer term investment.   Where as debt is better suited for investment opportunities with more instant gratification.   A bank isn’t going to lend on the bigger picture. So in many cases the innovators and best ideas need to be financed by savings.