So in this picture we're just drawing, a leakage is savings.
Alright, it was generated, it went into household's pockets,
and they took it out of the income stream.
All right, and the injection is investment.
This is money that is out of the system, it's in the
financial sector, and investors go and get it, bring it back in.
All right?
So that's an injection, and what you realize if you think about this is,
the economy will be stable at the place where injections equal leakages.
All right?
Now if leakages, savings in this case, are bigger than injections, which
is investment, you can see that the economy is going to decline.
All right?
We took out 10 and only 5 come back in.
The economy will decline.
And in this respect, it's important to think about the financial crisis.
What happened when the financial crisis started?
Well, people became very afraid because they realized that their
house wasn't worth what they thought it was, that their mortgage
was a lot bigger than they thought it was, relative to
the value of their house, that they might lose their job.
They started saving more, leakages grew.
At the same time, investors looked at the future and they said, Wow.
This doesn't look good.
I don't want to build that new factory, because I don't know
if I'm going to sell what I would produce in it next year.
So they started investing less.
Okay?
So the leakage became greater.
The injection became smaller.
The economy went straight down.
Okay, and that's the beginning of the financial crisis.
Now, there are some other things that happened in the economy.
Just to go through them briefly, besides saving some of our
money, we also pay taxes with some of it, all right?
In fact, we pay taxes every place in this circular flow.
We pay taxes when we get our money,
while we're spending our money, businesses pay, right?
All kinds of taxes coming out, and these flow into the public sector, all right?
And, the public sector then puts the money back in, in the ter, in the form
of government spending, or in the form of
transfer payments to people: unemployment benefits, pensions and whatever.
So, you see that we have a new leakage, which
is tax, and a new injection, which is government spending.