Not Spending is Not Investment

I see this logical error so constantly, almost every day, that I feel the need to reiterate. Personal saving, virtuous and useful as it is for individuals, does not increase investment. This is what I call the “lump of money” fallacy (a.k.a. the loanable funds model).

Ask yourself:

If you transfer $10K from your bank account to mine for a vacation package (spend), do the banks have more money to lend for investment?

If you don’t transfer the $10K to my account (save), do the banks have more money to lend for investment?

In which scenario am I more likely to invest in cabaña improvements? In which scenario will my employees produce more massages?

A huge amount of the thinking you see out there re: spending, saving, consumption, and investment is crippled by this simple error of composition.

“Saving” ≠ “Saving Resources”

“Saving” Versus Saving for the Future

Cross-posted at Angry Bear.






12 responses to “Not Spending is Not Investment”

  1. The Arthurian Avatar
    The Arthurian

    There is no nexus, Keynes wrote, which unites decisions to abstain from present consumption with decisions to provide for future consumption.

  2. Ramanan Avatar

    These are the things Keynes debunked in the 1930s as Arthurian notes above but the myths still remain!

    “In the natural sciences, controversies are settled in a few months, or at a time of crisis, in a year or two, but in the social so-called sciences, absurd misunderstandings can continue for sixty or a hundred years without being cleared up.” – Joan Robinson.

  3. Nick Edmonds Avatar

    This is probably the number one error in economics. The problem is even people who understand it can end up making the same mistake without realising it when it arises in a different form. (I’ve no doubt I’ve done so myself at points, before anyone picks me up on something I’ve written.)

  4. jp Avatar


    could you clarify something for me:

    If the government didn’t sell bonds when it deficit spends, and just created new money instead, would there be more more funds available for private investment?

    For example a private investor can currently choose to buy either government bonds, or private sector assets. If there were no government bonds available to buy, he would only be able to buy private sector assets. So if the government didn’t issue bonds, would more money end up going into private investment?


  5. Tom Hickey Avatar


    Tsys are instantly convertible into deposits/reserves through the highly liquid tsy market. Moreover, sale is not even necessary since tsys are the highest grade collateral and regularly used for repo. Reserves/deposits and tsys are essentially equivalent. Wall Street like tsys because of the convenience and it would make no difference if the US abandoned tsy issuance other than loss of the interest that which otherwise have been paid out. Since tsy issuance is not necessary operational, it’s really a subsidy. In effect, reserves are a deposit account at the cb and tsys are a time account. The difference is the spread of interest paid and interest rate risk.

  6. Nick Edmonds Avatar

    @Tom Hickey

    Whilst I agree with much of what you’re saying there, I don’t think you can suggest that Treasuries and reserves are perfect substitutes. If they were, you would not expect QE to have any effect on bond yields, equity markets or the exchange rate, and I’d say there was enough circumstantial evidence to suggest that it does. How much actual impact this has on private debt and equity issuance is another matter.

  7. Greg Avatar


    Every purchase of private sector assets is not investment in the economic sense of the word. You are correct that if no govt bonds were available, everything purchased would be a private sector created thing. Problem is if the purchases simply result in reshuffling of already created things like houses or even stocks (not IPOs) that cant be considered “investment”. I know we have been programmed otherwise the last thirty years, my 401 k advisor has been calling what I do investment for years, but its just not true.

    Obviously with no govt bond option more shuffling of private sector goods would occur but there would still be govt purchases. Govt would still buy something and what they buy and how much they pay would still not be limited by what a private sector actor is paying.

  8. Oliver Avatar


    Depends on what you mean by investment. As Nick Edmunds says, and as would be expected, there is evidence that QE caused at least a temporary rise in prices of private securities (and a fall in exchange rates). But the real question is whether money that is exchanged for risky assets necessarily causes the accumulation of fixed capital (machines etc.), thus providing for future production. The Keynesian demand side story suggests that the main cause for investment in fixed capital is consumption, which may very well increase with higher yields on riskless assets.

  9. Asymptosis Avatar

    @Oliver “Depends on what you mean by investment.”

    Meant as economists use it (when they’re being consisten and coherent): investment in fixed capital. Not the vernacular “investment.”

    Yes, you ask exactly the right question re: those two types of “investment.”

  10. Tom Hickey Avatar

    @Nick Edmonds

    Nick, I would say that the effect manifests further out on the curve as maturity risk increases. Short term bills and reserves are pretty much interchangeable and large firms and banks treat them as such. In large amounts overnight interest matters. Of course, firms and banks will attempt to optimize return consistent with cash flow requirements and will accept greater risk accordingly. I’d say the analogy with demand and time deposits-CDs is pretty close.

  11. Tom Hickey Avatar

    Right, the ordinary language and financial meaning of investment is different from the economic on. The ordinary language and financial meaning is “saving” in economic terms unless firm spending on capital goods is involved, ‘investment” in the economics sense only applying to funds spent on capital goods.

    In a closed economy without govt or external sectors, there are two sectors, households and firms. Firm spending is on production of consumption goods and capital good. Spending on capital goods is called “investment.” Assuming all consumption goods are bought with income from production in a period, then the residual of household after consumption spending is called “saving,” defined as income not spent in the period. Funds firms spend on production of consumption goods equal income spent on consumption goods by consumers. Therefore the amount saved by households is equal to the amount spent on capital goods as investment. From this it is often erroneously concluded that saving funds investment, whereas the opposite is the case, since income from firm spending on capital goods as investment is saved (not consumed) by households. This would only be true in an economy with a fixed supply of funds — Steve’s “lump of money” aka “loanable funds” underlying IS-LM models.

    But it is true that saving equals investment in another sense. When firms spend on investment the value of the firm increases and since firms are owned by households, household net worth increases and that is a gain that is saved until it is spent. But this gets spent either on consumption or portfolio shifting by selling some equity or other asset resulting from investment like RE, and that just transfers the asset to someone else’s portfolio (savings), even though it is commonly called financial investment.

  12. Nick Edmonds Avatar

    @Tom Hickey
    If you’re talking about short term bills, then I’d be inclined to agree with you.