"An economy is a closed system" that's not quite true.
The economy is a balance between things that create value and those that destroy it. In a healthy economy more value is created than destroyed so as long as the 'savings' is close to the amount of new wealth created there is no problem. The problem is when people try to store more value than than the genuine amount of new wealth created. Often it's as simple as a bubble created by over-investment followed by a crash back to actual value. However, the special case of people 'investing' in cash cash does strange things which are directly harmful even without a crash.
You're right. I was referring to exchange transactions, to simplify. Ie. you need a buyer and a seller (or an investor and an entrepreneur). It's not closed in the strict sense, because there is growth.
Our current situation is similar to your final sentence - that of heavy liquidity preference - there are a lot of sellers and too few buyers, and investors who are mostly storing wealth in cash or liquid assets.
The economy is a balance between things that create value and those that destroy it. In a healthy economy more value is created than destroyed so as long as the 'savings' is close to the amount of new wealth created there is no problem. The problem is when people try to store more value than than the genuine amount of new wealth created. Often it's as simple as a bubble created by over-investment followed by a crash back to actual value. However, the special case of people 'investing' in cash cash does strange things which are directly harmful even without a crash.