Scott Sumner  

Have an opinion about string theory? How about macroeconomics?

The Basics: A Socratic Dialogu... Eric Posner's Tin Ear...

Here's Paul Krugman:

In his incredible essay "The Great Slump of 1930" - an essay that reads remarkably well to this day, as an analysis of our crisis as well as his - Keynes briefly vents a bit of frustration. "For -- though no one will believe it--economics is a technical and difficult subject."

It's a peevish line, easily taken the wrong way. But it is a line I think of fairly often, and it came to mind reading a recent post by Brad DeLong.

. . .

And what made it sadder was that Kinsley clearly didn't understand what was going on - that there are issues on which there's a big difference between just being clever in general and being a guy who really knows what he's talking about. He thought that a gut feeling - he himself put it that way - plus slick writing entitled him to weigh in on macroeconomics. It didn't.

I'm not talking about being a paid-up, card-carrying member of the guild. There are quite a few people with all the professional credentials who are nonetheless useless or worse on actual policy issues, and a significant number of self-taught people without formal credentials who do a fantastic job. No, what matters is a large investment of time and hard thinking - and also a lot of reading of what other smart people have said, not to mention economic history. Sorry, but just being a clever, facile writer doesn't cut it - and imagining that you can just brazen it out in this arena is a recipe for serious embarrassment.

And to turn from the generic to the personal, when it comes to liquidity-trap economics - what happens when short-term interest rates are near zero, so that conventional monetary policy no longer works - I invested a lot, a long time ago. There are issues I didn't cover in my work on Japan back in 1998, notably the effects of private-sector debt, but I covered a lot. When I make predictions about the effects of monetary or fiscal policy in this environment, I could very well be wrong, but I'm not going to be wrong in ways that someone who has never studied these issues and is shooting from the hip or listening to his gut is going to discover.

Notice that Krugman is aware that this view could be "taken the wrong way." So let's think about why that is. Suppose we were talking about string theory instead of macro. Imagine I was debating a string theorist, and I told him the theory was a bunch of worthless nonsense, as it was not refutable. He might respond that I didn't know what I was talking about. And to be honest I would have to agree with him, I don't know what I'm talking about in the realm of string theory. And having once read someone who does, who also criticizes the theory for being unfalsifiable, doesn't change that fact.

I don't think many people would be insulted if you told them that they are not qualified to debate quantum mechanics, or biochemistry. But they do get offended when you tell them they are not qualified to debate macroeconomics. Why is that?

Perhaps because people can immediately recognize that fields like physics and biochemistry are way over their heads, but macro looks deceptively simple. Macro uses a lot of terms like money, saving, interest rates, investment, income, demand, unemployment, inflation, exchange rates, debt, deficits, etc., that seem to correspond to things in our everyday experience. And we obviously do have opinions on things in our everyday experience. And we are entitled to those opinions. But in fact almost none of these terms mean the same thing in macro as in everyday life. Commenters are often puzzled by the S=I identity. How can it be an identity if I were to decide to put some money under my mattress and yet investment did not rise at that same moment? They don't realize that putting money under your mattress is not what macroeconomists mean by saving.

And the same is true for the others. When people hear about the Fed pumping money into the economy they wonder who the lucky duckies are that get all this money. They think of money as being like wealth. "Bill Gates has a lot of money." Um, no he doesn't, not 'money' in the sense that I use the term (cash and bank reserves.) It also makes a huge difference to a macroeconomist whether you are talking about real or nominal exchange rates, and yet most people don't know the difference. People often don't know that home building is capital investment, and contrast people who "save" with those who "spent" money on a new house (a nonsensical statement to a macroeconomist.) They think an unemployed person is an adult without a job. They don't know the difference between supply-side and demand-side inflation, and hence think inflation reduces living standards. They think deficits are bad because, well because they sound bad. Or because families have to live within their means. Or because current account deficits mean we are exporting jobs (not true.) Or that current account deficits mean we are borrowing money from the rest of the world (not true, although even some macroeconomists believe this one.) Or that "income" is that stuff you report on your 1040 form. Or that the "G" in the GDP=C+I+G equation is government spending. Or they think demand means something like "amount purchased." Or they confuse the money market with the credit market. BTW, the media feeds these misconceptions.

I know lots of conservative non-economists who oppose fiscal stimulus. Suppose one of them debated Krugman on the issue. If I watched the debate I'd probably end up agreeing with the policy view of the stimulus opponent, and also thinking that Krugman absolutely destroyed my friend. Left him on the floor in a bloody pulp.

Since I'm going to get accused of being an elitist, I might as well go all in. I'd put many PhD economists into the "unqualified to debate macroeconomics" category. And yes, there are a few non-economists who have become pretty skilled debaters on macro issues, especially in the blogosphere, including some brilliant commenters. So these are just generalizations, not hard and fast distinctions. Even more than Krugman, I'm unimpressed by credentials (but then I would say that, having far fewer than Krugman.)

Sometimes I see thoughtful comments that are wrong, and I feel bad. I think to myself "I'd have to teach an entire course on macro to really explain to that guy where he went off course." And I just can't do that. So I do the best I can with the limited time available. Often the comments go beyond "wrong" into the realm of meaninglessness (i.e. "banks don't lend out reserves.") If some of my responses seem inadequate, that's probably because they are. Yes, I "haven't really answered" your question.

PS. The 5 most important words in Krugman's post are "not to mention economic history." A macroeconomist who's not well versed in economic history is like a political scientist who knows little of political history.

Comments and Sharing

CATEGORIES: Macroeconomics

COMMENTS (41 to date)
Joe writes:

Could you recommend some books on economic history for a non-macroeconomist who would like to improve his knowledge in the area?

Conor writes:

The average person definitely doesn't know the difference between supply-side and demand-side inflation, but I don't think that explains why people think inflation reduces living standards. Its probably that people misunderstand that their salary is a price like everything else.

Also, can anyone tell me what G is if it's not government spending? A couple years of undergrad econ and some googling have, shockingly, lead me to the wrong answer.

David R. Henderson writes:

G in the C+I+G is government spending on goods and services. So it excludes a huge amount of federal government spending, much of which is on transfer payments.

Philippe BĂ©langer writes:

I think I remember you saying you were planning to convert your blog into a book. I really hope you do so one day and adress the most frequent economic fallacies you encountered over the years.

Conor writes:

Phew, I'm glad that's the distinction, because I knew that much going in. I was afraid Scott was saying G has absolutely nothing to do with govt spending and that I had missed some pretty important info somewhere along the line.

Appreciate the response

Rajat writes:

I've learned a huge amount about macro from reading your posts, Scott. I don't suppose before you gave up teaching you video-recorded one of your courses for posterity?

Rajat writes:

Conor, sometimes I feel that Scott exaggerates for effect, which can be a bit bemusing. Like on the current account deficit: a CAD does not imply we are borrowing from the rest of the world - we may be selling property or shares in companies - but some of the CAD may be financed by selling debt/borrowing. Is that not right, Scott?

Tom writes:

The difference between physics and economics is that there aren't 12 physicists sitting in a room debating how they should alter the momentum and/or position of the US. When Krugman says "if" he is wrong he is wrong in different ways he is right- when economists like Krugman are wrong they wreck economies. This should lead to him being more humble and cautious, except he is playing with other people's lives and not his own. I would think of all people, one who thinks the Federal reserve messed up in 2008 would appreciate this.

If we are going to talk about slick writers with gut feelings- that description fits Keynes to a T- the school of thought named for him no longer follows his work directly and fair amount of his work didn't even last his short life time ("when the facts change, my opinions change" is famously atributed to Keynes, though I may be exposing my historical ignorance here).

This isn't to say that Keynes was a buffoon or a charletan, only to note that it in economic history gut feeling and personality/writing ability has gotten a good many people to the top.

EB writes:


You say "They don't realize that putting money under your mattress is not what macroeconomists mean by saving."

To be right you should make clear that it depends on how government spends its revenue from seignorage (=the additional money under the mattress). It is saving if and only if government spends it in whatever it is accounted as investment.

J Mann writes:

I agree with Scott - it's an interesting public policy issue of how to decide which policies to support on issues you can't understand without an unreasonable committment of study, and that philosophical question is probably the main reason I follow him. (That, and it's an important public policy question).

With that said, let me say:

1) Kinsley was a heck of a prose stylist. Look at this thing of beauty from the Kinsley Krugman kerfuffle:

2) Krugman's being kind of a bully to Kinsley, who wasn't asking whether QE would increase inflation, but rather what the model was to cover government commitments over the long run without monetizing the debt.

Presumably the answer is:

a) Monetizing the debt at the levels Kinsley finds plausible actually doesn't raise much money (if true);

b) Future obligations aren't as scary as they look to Kinsley and 2003 Krugman (if true); and

c) It's more plausible that a combination of economic growth, some kind of control of health care spending, and tax increases will cover future obligations.

None of that takes a Ph.D. to discuss, I think - it's mostly accounting and some predictions about the future. It certainly didn't require Krugman sighing about how sad it was that even a stand-up guy like Kinsley is not smart enough to understand Krugman.

David writes:

I for one would be very interested in a systematic rebuttal of those "errors" of which, having only a dilettante interest in economics textbooks, I would probably commit quite a few.

ThomasH writes:


The fundamental error in macroeconomics is to think that a government with it's own currency should react to a recession by cutting spending and or raising taxes. Just because it is conventional wisdom in many European finance ministries, and VSP in the US does not make it so. Although, if the monetary authority is doing its job properly, governments shouldn't do anything different what what they should be doing when there is no recession, doing that will probably have them increase spending on activities whose discounted present values have increased with lower borrowing costs. This will appear to a naive observer that they are doing "fiscal policy" to "fight" the recession.

Andrew_FL writes:

I'm reminded of this Murray Rothbard quote:

"It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a 'dismal science.' But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance."

Incidentally I happen to know a string theorist who has some degree of interest in economics and yeah, he'd definitely say you don't know what you're talking about about string theory.

Also, it should probably bear noting, one of the problems of macroeconomics, should in fact be to make people's intuitive understanding of saving, line up with the actual macroeconomic definition of saving, in practice: we do want putting money under a mattress to be able to translate into increased investment. It doesn't have to, and the way things work now it doesn't, but there are arrangements under which it could.

EB writes:

Andrew FL,

The relevant issue is how government finances its total spending. Other than occasional/regular revenue from selling goods, services and assets, there are two sources: current tax revenue and future tax revenue (the latter = debt financing). Current tax revenue includes revenue from seignorage, that is, from issuing money. Whatever the effects of the additional money on private spending, it is a source of government revenue. To the extent that government is spending part of its total revenue on whatever is counted as investment in the national accounts, we can always say that part of that investment is being financed by seignorage. Indeed, seignorage is a minor source of revenue and our main concern is the relative importance of current and future tax revenue.

Echo writes:

I thought you could consider that increased demand for money to be saving (you are either consuming or saving your income), which would correspond to unplanned inventories to balance S and I. What is the definition Sumner is referring to?

andy writes:

Having just heard some debates of Richard Dawkings/Lawrence Krauss with creationists regarding beginning of the world, I would say that there are people wanting to address problems in quantum physics without knowing anything about it. The creationist movement in the USA is not so small after all.

Njnnja writes:

I believe the phrase you are looking for is not even wrong.

Andrew_FL writes:

@EB-Was your comment supposed to be directed at someone else? I'm puzzled because my comment wasn't regarding government finance.

Lorenzo from Oz writes:

"A macroeconomist who's not well versed in economic history is like a political scientist who knows little of political history."

Amen brother! I have a particular beef with folk who write about monetary policy and "bubbles" and show no grasp of C19th economic history. Of course, if they did, they might be less inclined to write about monetary policy and "bubbles".

Lorenzo from Oz writes:

Tom: "The difference between physics and economics is that there aren't 12 physicists sitting in a room debating how they should alter the momentum and/or position of the US."

The difference between physics and economics is that physics does not deal with agents who can react to what you do or say.

Josh M writes:
But they do get offended when you tell them they are not qualified to debate macroeconomics. Why is that?

Isn't the difference that string theorists do not want to direct how and where a layperson's money is spent? Similarly, climate science attracts lots of very passionate interest from laypeople.

James in London writes:

Another issue with PK and his ilk is that their macro views are just tactical. Everything has to be funnelled to fiscal and away from monetary, even when they know monetary is sometimes helpful.

They believe government (fiscal) allocation of resources is better than market allocation, more moral. It's obvious that a visible hand is fairer than an invisible hand. Who could argue with that?

EB writes:

Andrew FL,

My comment was related to the last paragraph of your first comment, the one on translating additional money under the mattress into additional investment.

Scott Sumner writes:

Joe, In my field of macro, I'd suggest Friedman and Schwartz's Monetary History of the US. And Barry Eichengreen's Golden Fetters.

Conor, Good point.

Rajat, Yes, it can be the case that a country is borrowing from the rest of the world. And I don't have any taped lectures.

Tom, This post was in no way, shape, or form a defense of Krugman's style of writing, or Keynes for that matter. Both writers are too impolite to those who disagree with them.

EB, Putting money under a mattress is not saving, regardless of what the government does.

J Mann, I did not follow that debate, but everything you say sounds plausible. Again, this post is not a defense of Krugman.

David, I have many post here, and many more over at money illusion that discuss those errors. If you search key words like "cognitive illusion" especially over at money illusion, you'll find many examples.

Andrew, Just to be clear, I was just pretending to have that opinion of string theory, it's not actually my opinion (I have none.)

Regarding saving, here's one problem. Macroeconomists are thinking in terms of changes in aggregate saving. Now consider a given amount of currency in circulation. Any attempt by me to hoard currency implies an equal level of dishoarding by someone else. So in putting money under the mattress I may in fact have saved at a personal level. But aggregate saving did not rise, and aggregate saving is what macroeconomists mean by saving.

It gets more complicated when the government augments the stock of currency, with monetary injections. If the new currency is considered a liability, then any extra saving by hoarders is offset by dissaving by the government that issued the currency. If it's not viewed as a liability (say it will never be repaid), then it is a part of the capital stock. But that's the nominal capital stock. If prices rise in proportion, then the real capital stock hasn't changed.

That's just the tip of the iceberg of what many people don't grasp about currency hoarding.

Echo, See previous response above.

Njnnja, Thanks.

Josh, That's part of it, but it doesn't explain the whole problem.

James, I think those sorts of biases tend to occur at the subconscious level. Most people think they are well-intentioned.

Bill Woolsey writes:

Saving is income less consumption. Receiving income in the form of currency and stuffing it under the mattress is a type of saving.

I am not sure what Scott was trying to say, but I think the view that stuffing money under the mattress is the only way to save is the error. Identifying the purchase of stocks, bonds, or real estate with what economists mean by "investment" is key error. This relates to Scott's point because using income to purchase stocks, bonds or real estate counts as saving in macroeconomics.

The supposed problem "people are saving rather than investing" is just wrongheaded from the way economists use the words. I think that people are accumulating money rather than buying financial assets can be a problem. And further, households want to save more but firms don't want to invest more is a problem as well--with investment meaning the purchase of newly produced capital goods. And the problems are plausibly related.

EB writes:


Your explanation cannot deal with stocks and flows. Since you are talking about S=I, you are using the flows of national accounts. Therefore, I must assume that whenever you relate stocks and flows, you are referring to an increase in some stocks. To talk about S=I and ignore changes in stocks makes no sense.

In your reply you assume that there is no increase in the stock, so of course there is no additional money in the economy. But the assumption makes no sense in the context of your original sentence.

Yes, it's hard to explain macro.

EB writes:


In your reply to Andrew you fail to take into account what government has financed with the additional money. Even if you have in mind Milton's helicopter you must acknowledge that government has financed a transfer to those that got the new money, so total government expenditure increased by the amount of the new money, but not G as measured in national accounts (see David Henderson's comment). The transfer, however, financed an increase in private consumption (C) and in private saving (S) as measured in the national accounts.

Now, if government issues money to purchase new machines, government is investing and the I in the national accounts increases (I must acknowledge, however, that some macros would say that G rather I increased; one has to be make clear what goods are included in G). That much one can learn from Milton Friedman and many other macroeconomists, but not from all macroeconomists.

Tom writes:


Yes, that is the point. A physicist doesn't have to defend his position to layman because he isn't promoting policy. He can shrug off their ignorance without being arrogant. An economist like Krugman (one who specifically recommends policy) isn't just saying "you are an idiot/ignorant/charletan" he is saying so and then claiming the right to interfer in his life.

@ Scott- After rereading, I totally missed the point of the PS, true and clever.

vikingvista writes:

The layperson's greater motivation to comment on economics than biochemistry isn't so much that he imagines he is more familiar with economics. It is that he imagines he is more familiar with how legislative requirements (like the tax code, or business regulations) directly affect his life.

Macroeconomic debates are almost invariably about government policy, and government policy is about politics. And politics is the art of forcing remote individuals to do what those individuals know is not in their best interests (explaining why threatening police action, as nearly all legislation does, is typically necessary for compliance).

To a layman, the difference between macroeconomics and biochemistry, is that one is about what already is, while the other is about what strangers are going to do to him.

Andrew_FL writes:

@Scott Sumner-What I meant was, an increased demand to hold money, that is to say, a decline in velocity, represents a decision to defer consumption, or "save", and should, under the right conditions, increase the supply of loanable funds and therefore the amount of investment that occurs. It can't do that, unless the increased demand (decreased V) is matched by an increase in the supply of money. Hoarding would tend to represent such increased demand to hold money, right?

It becomes obvious that any decision not to spend income on consumption, must result in increased investment, as long as nominal GDP is not allowed to decline, just as a matter of the accounting identity, given that we either consider G as merely peculiar forms of consumption and investment, or we hold it constant. And ignoring net exports, of course. It's easier to think about a global economy in which we don't care about arbitrary lines on a map.

Keith E. writes:

String theory and economics?

John Lester may very well have a better understanding of the behavior of a baseball than the average Physics PhD.

Any many business folks are likely to have a better understanding of economic behavior than your average Economics PhD.

Experiences is still a very good teacher. And a thorough understanding of string theory or Newtonian physics is not necessary to understand the behavior of a baseball, even though Physics is indeed the study of the physical world.

Post-Soviet Yankee writes:

Non-macroeconomists feel more entitled to debate macroeconomics more than string theory because the policy results of macroeconomics debates actually affect them. The results of debates on string theory have no impact on my future and concern a physical reality which cannot be changed, but debates on macroeconomics define the future of the societies in which we live and are entirely within the human control.

If macroeconomists had a track record like physicists, and showed a willingness to question theories when their predictions were falsified by empirical reality, or to replace more orthodox theories with more accurate ones, perhaps we'd be more willing to give them more deference.

Perhaps it's because macroeconomists are masters of their models but have precious little experience with the reality that their models represent. They always imply "ceteris paribus", when it never is, and then extrapolate from that claims which are empirically untrue. When those false claims are things which non-experts know are garbage from personal experience, ya'll lose the authority to demand that you not be questioned.

Economics is intrinsically political, and you're serving the wrong masters to be popular. Until your field understands that and makes amends, don't expect any love or respect from the masses.

P Daigle writes:

Keith E. "John Lester may very well have a better understanding of the behavior of a baseball than the average Physics PhD."

John Lester has very specific knowledge about a very specific area of baseball behavior, gleaned from years of both practical and theoretical study. That is, given a baseball, he knows how to grip and throw the baseball in order to guide it to a specific area on a specific arc. He may or may not know why a baseball behaves the way it does. He may or may not know how a baseball deforms when struck by a bat. He doesn't actually need to understand how a baseball behaves under different conditions to do his job.

In fact, he may be completely wrong about things that would appear to be extremely important: when Tom Glavine joined the Mets, he believed that of all of his pitches, the one most likely to induce a ground ball was the change-up. As it turned out, statistically this wasn't the case. So one of the better pitchers of his generation held a false belief about the results he could expect from different pitches. This false belief did not prevent him from being amazingly successful.

Experience is a haphazard teacher, human memory stinks, confirmation bias is rampant. Without reflection and analysis, one can draw completely false conclusions about the behavior of the larger system. But for whatever reason, whether because the competition is similarly handicapped or because the system is just damned hard to predict, one can believe false things in baseball or business and still be very successful.

dwb writes:

But see, the problem is that it is not about winning a debate. I can win a debate on Catholic interpretation of Genesis, how is that relevant to anything down here on earth?

It's about appropriate policy, and there are lots of opinions on that even within the macro world. Macro people are not even sure if there is there one equilibrium unemployment rate, or many, and we cannot settle this with an experiment or double blind study.

The problem is that macro economists have been so wrong over the last 10 years that laypeople* think that the credentials are worthless. Wish I could disagree- the Fed forecasters cannot forecast a recession 1 year out and continue to pump out forecasts that are a)overly optimistic and b) show inflation never above their 2% target.

The thing is, the Fed wields enormous power over the average person: A bunch of technocrats have the power to raise short term rates to 327% and cause 30% unemployment. The FOMC has far too much power to leave the debating about policy to a select few technocrats who have mostly been enormously wrong. In fact, I think it's time for FOMC members should be directly elected - we would get a much more healthy debate about Fed policy.

*by "laypeople" I mean those with "only" an M.B.A. or Bachelors in business, finance, or economics.

[Thanks for your clarification of what you meant by "laypeople", dwb. By way of contrast for our regular readers: Usually the term "layman" or "layperson" as used in economics refers to those with no background at all in economics--a generic someone with no assumed professional or specialized knowledge in the field other than what might be an exposure to economic concepts in ordinary daily experiences. Having an MBA or even BA in business, finance, or economics probably puts a person at above layman level, at least in ordinary economics parlance. Though, maybe not. Might depend on how many classes the person skipped!--Econlib Ed.]

Ryan writes:

[Comment removed pending confirmation of email address and for foul language. Email the to request restoring your comment privileges. A valid email address is required to post comments on EconLog and EconTalk.--Econlib Ed.]

Mike Sax writes:

"I don't think many people would be insulted if you told them that they are not qualified to debate quantum mechanics, or biochemistry. But they do get offended when you tell them they are not qualified to debate macroeconomics. Why is that?"

I think one reason could be that they at least understand that with economics, their own material livelihood is on the line.

jayedcoins writes:

This just sounds like bitterness, to be frank. How dare people attempt to educate themselves on important issues and get involved in the discussions!

Rather than knocking people down a peg for not being experts, I would think the experts -- especially those that represent major EDUCATIONAL institutions -- should focus on spreading knowledge in a positive way. Sure, most average Joes or Janes think of saving as stuffing a hundred under their mattress, but instead of chastising them for that, maybe you could evangelize why that's wrong.

Let's encourage people, no matter their educational background, to try and become literate in these discussions. We don't all need to understand the mathematical models, or even wonkier topics, but I think it would benefit society if more people were at least brought into the conversation by being taught the meaning of basic topics (like the saving example, or equity -- one that always seems to trouble).

If anything, the scariest part is that there are plenty of comment section "economists" with no formal training that exhibit better understanding of the topics at hand than the likes of Rand Paul, Paul Ryan, Elizabeth Warren, or pretty much any fiscal, financial, or banking policy-maker in Washington.

Min writes:

About terminological confusion: I think that the remark about the media feeding misconceptions deserves more than a "BTW". The media are a major source of these misconceptions.

Scott Sumner: "Often the comments go beyond "wrong" into the realm of meaninglessness (i.e. "banks don't lend out reserves.")"

Hmmm. Investopedia gives this definition of bank reserves:

"Bank reserves are the currency deposits which are not lent out to the bank's clients."

( )

I think that Aristotle would agree that banks do not lend out reserves, **by definition**.

Or is this another case of conflicting definitions?

Hilda writes:

After reading this piece as a non-macro-economist I'm beginning to wonder if these macroeconomist could even participate in the public debate with the rest of us. If one refuses to acknowledge that most laymen understand unemployed to mean an adult without a job, then there is really no point in participating in public debate, perhaps one should stay in academia, fight out there, and return to the outside world when one has figured out a new vocabulary. Just like while most people understand that mr gates might keep a lot of his wealth in stocks and bonds, people would be right in assuming he also keeps a kitty of hard cash to cover his daily expenses containing what most would understand to be "a lot of money".

Min writes:

Scott Sumner: "Regarding saving, here's one problem. Macroeconomists are thinking in terms of changes in aggregate saving. Now consider a given amount of currency in circulation. Any attempt by me to hoard currency implies an equal level of dishoarding by someone else. So in putting money under the mattress I may in fact have saved at a personal level. But aggregate saving did not rise, and aggregate saving is what macroeconomists mean by saving."

Sorry, the logician in me just can't take it anymore. This is a good example of begging the question. Of course, if one assumes that the amount of currency in circulation is a constant (given amount), then if someone takes money out of circulation by stuffing it under their mattress, the same amount of money must be put into circulation by one or more people. Therefore aggregate saving did not increase. The conclusion is a restatement of the original assumption.

If one however assumes that the action of stuffing money under the mattress is independent of other acts of saving and dissaving in the economy, then by that act aggregate saving decreases.

Gaz writes:

I agree with Min and Bill.
Putting your money under the bed is a form of saving. It means consumption has been less than income. The balance is saving, in this case the accumulation of physical cash - the liabilities of the central bank. It does not imply "an equal level of dishoarding by someone else". Unless you make some convenient but odd assumptions.

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