03-21-2009, 12:18 AM
Dears
It would lack generosity if I don't say the words that I do appreciate efforts for calmness, though use of words like "economic tank dragging" negatively effects such peace building measures.
Time and again I have mentioned that I am only a student of financial fields, as in my view learning process continues in whole span of life. Therefore, to a student (like me) it is not personal ego, but a matter of reasoning substantiated by other sources. However, it is upto reader's perception how does he/she view.
It is not my intention to deliver a lecture on economics fundamentals here on this forum, but just to explain simple concepts that participants are mixing-up here, I wanna write few lines. Please note the situations/ example I am presenting here are very simplified version just to understand in light manner.
MODEL 1 I never said SAVINGS does not create jobs. Yes, it DOES. Savings transforms (through banking and non-banking channels)into investments which create jobs. Disposable income converts into consumption and savings, i.e. whatever is not consumed out of disposable income is saved, which later on is invested again in the economy. What I am saying is, out of personal income (i.e. before tax salary) government deducts income taxes (i.e. a form of mandatory savings) and gives remaining income to the person, which is disposable income to him. Now, he does consumption and savings both out of this take home disposable income.
Historically, it has been a practice that out of this disposable income (or take home salary) a person consumes some and saves leftover. This savings, through banking/ non-banking channels, become investment which eventually becomes disposable income of others. This circle goes on and on. In this case, people are used to SAVE part of their income FIRST and later on purchase non-depreciable items like houses and also buy investment instruments like bonds, securities, future educational plans for kids (which accumulates interest), retirement plans, investment in pensions etc. etc. So, basically this savings turns later into buying non-depreciable assets like houses and investments. All three components in income i.e. consumption spending, SAVINGS, and investments through next rotation becomes personal (i.e. before tax income) and disposable income (i.e. after tax income). This circle keeps rotating. So, this is the general model, SAVE FIRST and then use it on consumption (or say purchase) of long-term non-depreciable assets (i.e. houses) and investment instruments.
MODEL 2 Now, their is 2nd model specifically speaking in credit based economies. Here what happens. The consumption part of disposable income is same as in above paragraph. BUT SAVING part is little different. Part of savings directly converts into long-term investment in investment instruments like Bonds, Securities, retirement plans etc. etc just like model 1. The other part of savings which was to buy long-term non-depreciable assets like buying houses is little different than 1st model. Here buyer saves initially for lets say 5% downpayment in cash and gets 95% loan or credit from bank and buys the home. Then later pays installments as repayment of principal and interest. So, rather than save first and then buy, people buy first and then save to repay each month . This is the phenomena which I mentioned in my previous post when I wrote the following paragraph, which I repeat here again for convenience.
I wrote, "Similarly, phenomena of âSavingsâ in highly industrialized consumption based economies where credit is available to public is different than low income third world economies where credit in not easily available to general public. At nation's level, taxes are mandatory form of savings in economies of first group, while at individual level, investments in non-depreciable assets like houses are form of savings which becomes easy through availability of credit."
Example I give an example to explain it further. Lets say a person has $1000 monthly salary. It is personal income. Lets say govt. deducts $100 income tax on it. This $100 is a mandatory form of SAVINGS at nation's level. Then remaining take home salary of $900 is disposable income. Some portion of this $900 would be consumed and remaining would be savings. Lets say out of this $900, that person consumes $600 and saves $300. Out of $300, $200 are saved for future purchase of house and $100 is for investment instruments (bonds and securities etc.). Total saving of $300 through banking system becomes investment and later disposable income of many others. This is model one which is credit free example.
Now, come to 2nd model in credit available economies. Here, rather than saving $200 for long time till the whole purchase price is saved, people save only for initial downpayment of house, lets say 5%, and then at this 5% equity buy a house with 95% of credit from bank. Now, people SAVE each month to payback to bank. SAVING here has changed its normal course, i.e. people do consumption spending on purchase of house first and then later save to payback.
Dears; my above post was not ALL INCLUSIVE RESEARCH PAPER ON CAUSES OF US RECESSION but was ONLY a response to âCREDIT and CONSUMPTION BASED ECONOMYâ. Because CFANerd found reasons of current US situation in âcredit and consumption based economyâ, I simply presented reasons FOR credit and consumption spending. It DOES NOT mean that I am âignoring other stimulants of GDP growthâ. Similarly YES, ânot everything is based on concept of spendingâ, but simply I was clarifying the IMPORTANCE of consumption spending, it DOES NOT mean I âignoredâ other factors.
Still, participants are completely free to develop their detailed reasons for âfictitiously increased real estate prices (as a result of speculative business), the over utilization of consumer based debt at micro level (which is resulting in nil savings)â. After seeing their reasons, I can reply though, either in favour or against those reasons. But it depends on their reasons of such factors. If I would disagree THEN I would provide my reasons why do I disagree. It DOES NOT mean that I should spill all the beans in one post and start writing an all-inclusive research thesis here for their critical analysis. By the way, does someone expect this?
Regards
It would lack generosity if I don't say the words that I do appreciate efforts for calmness, though use of words like "economic tank dragging" negatively effects such peace building measures.
Time and again I have mentioned that I am only a student of financial fields, as in my view learning process continues in whole span of life. Therefore, to a student (like me) it is not personal ego, but a matter of reasoning substantiated by other sources. However, it is upto reader's perception how does he/she view.
It is not my intention to deliver a lecture on economics fundamentals here on this forum, but just to explain simple concepts that participants are mixing-up here, I wanna write few lines. Please note the situations/ example I am presenting here are very simplified version just to understand in light manner.
MODEL 1 I never said SAVINGS does not create jobs. Yes, it DOES. Savings transforms (through banking and non-banking channels)into investments which create jobs. Disposable income converts into consumption and savings, i.e. whatever is not consumed out of disposable income is saved, which later on is invested again in the economy. What I am saying is, out of personal income (i.e. before tax salary) government deducts income taxes (i.e. a form of mandatory savings) and gives remaining income to the person, which is disposable income to him. Now, he does consumption and savings both out of this take home disposable income.
Historically, it has been a practice that out of this disposable income (or take home salary) a person consumes some and saves leftover. This savings, through banking/ non-banking channels, become investment which eventually becomes disposable income of others. This circle goes on and on. In this case, people are used to SAVE part of their income FIRST and later on purchase non-depreciable items like houses and also buy investment instruments like bonds, securities, future educational plans for kids (which accumulates interest), retirement plans, investment in pensions etc. etc. So, basically this savings turns later into buying non-depreciable assets like houses and investments. All three components in income i.e. consumption spending, SAVINGS, and investments through next rotation becomes personal (i.e. before tax income) and disposable income (i.e. after tax income). This circle keeps rotating. So, this is the general model, SAVE FIRST and then use it on consumption (or say purchase) of long-term non-depreciable assets (i.e. houses) and investment instruments.
MODEL 2 Now, their is 2nd model specifically speaking in credit based economies. Here what happens. The consumption part of disposable income is same as in above paragraph. BUT SAVING part is little different. Part of savings directly converts into long-term investment in investment instruments like Bonds, Securities, retirement plans etc. etc just like model 1. The other part of savings which was to buy long-term non-depreciable assets like buying houses is little different than 1st model. Here buyer saves initially for lets say 5% downpayment in cash and gets 95% loan or credit from bank and buys the home. Then later pays installments as repayment of principal and interest. So, rather than save first and then buy, people buy first and then save to repay each month . This is the phenomena which I mentioned in my previous post when I wrote the following paragraph, which I repeat here again for convenience.
I wrote, "Similarly, phenomena of âSavingsâ in highly industrialized consumption based economies where credit is available to public is different than low income third world economies where credit in not easily available to general public. At nation's level, taxes are mandatory form of savings in economies of first group, while at individual level, investments in non-depreciable assets like houses are form of savings which becomes easy through availability of credit."
Example I give an example to explain it further. Lets say a person has $1000 monthly salary. It is personal income. Lets say govt. deducts $100 income tax on it. This $100 is a mandatory form of SAVINGS at nation's level. Then remaining take home salary of $900 is disposable income. Some portion of this $900 would be consumed and remaining would be savings. Lets say out of this $900, that person consumes $600 and saves $300. Out of $300, $200 are saved for future purchase of house and $100 is for investment instruments (bonds and securities etc.). Total saving of $300 through banking system becomes investment and later disposable income of many others. This is model one which is credit free example.
Now, come to 2nd model in credit available economies. Here, rather than saving $200 for long time till the whole purchase price is saved, people save only for initial downpayment of house, lets say 5%, and then at this 5% equity buy a house with 95% of credit from bank. Now, people SAVE each month to payback to bank. SAVING here has changed its normal course, i.e. people do consumption spending on purchase of house first and then later save to payback.
Dears; my above post was not ALL INCLUSIVE RESEARCH PAPER ON CAUSES OF US RECESSION but was ONLY a response to âCREDIT and CONSUMPTION BASED ECONOMYâ. Because CFANerd found reasons of current US situation in âcredit and consumption based economyâ, I simply presented reasons FOR credit and consumption spending. It DOES NOT mean that I am âignoring other stimulants of GDP growthâ. Similarly YES, ânot everything is based on concept of spendingâ, but simply I was clarifying the IMPORTANCE of consumption spending, it DOES NOT mean I âignoredâ other factors.
Still, participants are completely free to develop their detailed reasons for âfictitiously increased real estate prices (as a result of speculative business), the over utilization of consumer based debt at micro level (which is resulting in nil savings)â. After seeing their reasons, I can reply though, either in favour or against those reasons. But it depends on their reasons of such factors. If I would disagree THEN I would provide my reasons why do I disagree. It DOES NOT mean that I should spill all the beans in one post and start writing an all-inclusive research thesis here for their critical analysis. By the way, does someone expect this?
Regards