Right, it is a neoclassical loanable funds theory of the savings-investment relation and interest rate determination. Savings are the 'supply of loanable funds' and the decision to save more because of deficits would constitute a shift out of the savings function, which cet par. would mean excess supply of lonable funds at the old equilibrium rate of interest that equated the supply and demand for loanable funds prior to the change in savings behavior brought on by deficits. Competition among banks for a limited demand for loanable funds would lead to interest rate cuts until the new (lower) equilibrium rate of interest is attained.
Keynesians (Post Keynesians, at least) would see things very differently. > If I understand the argument correctly, people >respond to deficits by saving more, and that puts downward pressure on >interest rates. well that's not the manner in which Keynesians want savings to adjust to investment, right? Rakesh
