When savings go up there is more capital to invest in new ventures, interest rates go down (more money chasing investment opportunities) and it signals the markets that it is a good time to take risks. When savings go down, interest rates go up and it signals the markets that it is a bad time to take risks. Inflation distorts those signals and makes people take risks when there aren't enough savings to justify those risks. High risks and low savings are a recipe for disaster.
Generally, when people are socking money away their savings account, or reducing their spending in some way, it means they're trying to expose themselves to less risk because they're worried about the future. People who are worried about the future don't start investing until their confidence has been bolstered by something. Excessive savings on their own don't lead to investment, they lead to deflation and economic decline.
The solution to this is to meddle with interest rates or policy.
You are right that a reduction in spending/increase in savings (whatever their form) does tend to correlate with interest rates decreasing, and vice versa, but this is a deliberate decision to speed the velocity of money up again before longer-term damage happens. It's not a long-term solution. Interest rates are in many way a fiscal ballast to keep the economy properly weighted.
The trouble with Bitcoin is it's inherently deflationary. Meddling with interest rates doesn't work if your currency is Bitcoin. You also can't have a healthy amount of inflation to keep the economy growing. If Bitcoin did become a de facto currency, we'd be poorer both economically and intellectually. The latter I believe because there would be less "excess" to spend on scientific research, as typically happens in periods of economic slowdown.
Historically the best time to make an investment or start a business is in lean times (depressions are good!), but people aren't generally that rational. The value of something (currency included) is typically driven by emotions. This is why what people feel about something is everything, from a product you're selling to your currency.
A few hours ago I thought Bitcoin was awesome and a good thing, but after thinking it through and arguing this point I'm convinced it's a bad thing and will lead to a longer-term harm if it is widely adopted and begins to replace traditional currencies.
>>>Generally, when people are socking money away their savings account, or reducing their spending in some way, it means they're trying to expose themselves to less risk because they're worried about the future.
No. That is totally against the American tradition of consumer banking (at least until 1970s stagflation) as well as the way banking has been practiced in Japan. "Save it for a rainy day" didn't come from nowhere. It's what most Americans used to practice. And in Japan they are exhorted to bank as a national good to fund loans to companies. A lack of confidence in the future -- incomes remaining the same -- would empty banks of deposits.
No. You're completely wrong and I'm starting to conclude that you're taking what's right, inverting it, and writing it as a comment.
The consumer confidence index is a measure of savings and spending. The more confident consumers are, the more people are spending and the less they're saving, and vice versa. This isn't an American thing.
What people have been taught and what people actually do are two different things.
If your money appreciates in value just by sitting there, why invest? It's the ultimate argument against investing. Take the sure thing, especially in a rough economy.
Similarly, you know how we always hear that people put out of work by new technology should move up the value chain? Where they gonna move to if people aren't buying things? Wants as opposed to needs are the sign of economic progress.
