Welcome to Money for the rest of us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it.

I'm your host David Stein. Today is episode 470. It's titled How the Economy Really Works

Savings, Investing, Consuming and Market Distortions. In today's episode I want to go back to the basics. How everything is connected, the important

linkages between spending, income, production, investing, and what about hoarding, and other market distortions.

There are some identities, some relationships that are so key to the economy that we really need to understand them and frankly be fascinated by them how this economic dance works.

We can understand the linkages, but we're never sure how businesses will react, how households

will react, what the government will do.

So let's take this review look at how everything is connected together.

The first identity is that spending in the economy equals income.

Every dollar spent in the economy is someone else's income.

Our salary, our income that we get from our employer is an expense of our employer.

When our employer buys desks for its employees that boost the income of the

manufacturer of the desk. That's the first identity.

Spending equals income. The second identity is that savings equals income less income, less spending.

If we're trying to save personally,

we have to spend less than we receive in income.

We're trying to save 10% of our income and we spend 10% less than what we took in.

In the US, the personal savings rate last month was 3.8%.

That's the amount that households saved as a percent of their disposable income.

Disposable income is income after paying taxes.

Now that's personal savings, household savings.

Businesses also save. When a business spends less than it receives in revenue in its

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