Mike Beggs wrote:
> This is not necessarily due only to manias and
> irrational exuberance, but can in fact grow out of 'too much
> saving/profits'.
How does this happen?
"Saving" in a period in necessarily equal to actual investment in the same period, i.e. to the investment in new long-lived plant and equipment plus the change in inventories.
It isn't a pot of "money" a part of which can be diverted from "investment" to the purchase of financial assets making "investment" in new long-lived plant and equipment and in inventory change less than "saving".
If "saving" and actual investment exceed intended investment there must be an unintended change in inventories (i.e. aggregate supply greater than aggregate demand) and output and income will fall until "saving" and actual investment are once more equal to intended investment (which, if the other components of aggregate demand remain unchanged as percentages of total output, will leave investment as a percentage also unchanged).
"I emphasise these obvious matters to clear our minds of the idea that the quantity of hoards depends in any way on what people are doing with their savings, or that there is any connection between idle balances and the conception (meaningless on my definitions) of idle savings. But I have only a limited hope of success. There is a deep- seated obsession associating idle balances, not with the action of the banks in fixing the supply of cash or with the attitude of the public towards the comparative attractions of cash and other assets, but with some aspect of current savings." (Keynes, Collected Writings, vol. XIV, p. 214)
Ted