Steven Landsburg has a column up at Slate that allows me to reiterate a couple of points.

In this whole world, there is nobody more generous than the miser—the man who could deplete the world’s resources but chooses not to. The only difference between miserliness and philanthropy is that the philanthropist serves a favored few while the miser spreads his largess far and wide.

If you build a house and refuse to buy a house, the rest of the world is one house richer. If you earn a dollar and refuse to spend a dollar, the rest of the world is one dollar richer—because you produced a dollar’s worth of goods and didn’t consume them.

Who exactly gets those goods? That depends on how you save. Put a dollar in the bank and you’ll bid down the interest rate by just enough so someone somewhere can afford an extra dollar’s worth of vacation or home improvement. Put a dollar in your mattress and (by effectively reducing the money supply) you’ll drive down prices by just enough so someone somewhere can have an extra dollar’s worth of coffee with his dinner.

So, I know Steve’s first paragraph was designed more for rhetorical impact than accuracy and that he is fighting the notion that misers hurt the world more than heavy consumers.

However, because this is going to be a part of general thesis I want to draw out, the miser is not as generous as the dedicated philanthropist. This is because the miser is withholding his assessment of the most utility maximizing uses of his money and that assessment is a valuable thing. Even if the miser knows very little he knows something and as always ignorance is not abdication.

Throwing up your arms and saying that the world is too complex, is itself a choice, it has consequences and you are bound to them.

The second paragraph is important because it continues to hammer home the idea that savings is the residual between income and consumption. However, I want to stress further that it doesn’t matter in a real goods sense how that residual is produced.

To give a key example, if consumer prices rise faster than incomes, so that real incomes stagnant or fall, but production does not fall, then this induces savings.

It induces savings because people cannot consume as much as before even though they are producing as much as before. The residual expands. Its why a currency devaluation is an increase in savings and an increase in savings induces a decline in a currency’s value.

Saying that if America doesn’t get its spending under control then eventually foreigners will lose confidence in American bonds, the dollar will crash and the Fed will be forced to chose between high inflation and high interest rates, is effectively saying that if the US does not reduce consumption then it will have to reduce consumption.

There are important nominal effects that have to be managed when some prices change rapidly and others are stuck, but the real story is a pretty boring one.

As a a last note, if this particular time path of consumption is not to your liking then you should purchase foreign assets. They will be cheap now and dear later. This will allow you to experience the inverse consumption path from America more generally.

Lastly on savings versus stuffing money into the mattress. Your choice between the two as a private citizen will not alter the time path of prices and interest. That is set by the Fed. If you save when the Fed wanted you to stuff, it will contract the monetary base. If you stuff when the Fed wanted you to save, it will expand the monetary base. Your actions will be offset.

And, importantly if the Fed is stuck at the zero lower bound then both of these actions will be contractionary to the overall economy.

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