The media keeps telling us that consumption is good for the economy, and that we need a lot of spending right now (whether in the US or Greece).
I understand that the economy is a dynamic system, initial conditions matter, and that occasionally you need to kickstart it or "prime the pump". But that seems to have been lost to the general notion that we should always consume and spend more.
Does spending and consumption really lead to prosperity? What's wrong with saving, investment, moderation, and conservation?
If nothing else, this constant pressure to spend more (to the point we need to ask the government to force us to spend) has to take a serious toll on the environment. And I can't see how that level of waste actually helps anyone prosper.
Sorry if this post doesn't do justice to a complicated issue, but to summarize somewhat imprecisely:
The monetary system we now have creates perverse incentives. If people save, then it means they save money, which means that nothing happens. If they spend, then that causes economic activity.
Under a proper monetary system, saving would be of something of value -- saving would be of wealth, ergo economic activity would be required in order to save. But under our perverse setup, "saving" just means flipping some bits in a computer.
Hmm... I guess that's the difference between saving and investment, although it's a somewhat fine line.
I would think that foregoing consumption (i.e. saving) would make it easier for someone else to borrow that money and do something more productive with it. But perhaps that's not necessarily true.
Anyway, complex issue, and I don't expect to understand it by the end of this thread.
No, I don't think it is the difference between savings and investment because the dichotomy itself is an arbitrary artifact of the monetary regime. Saving should mean things like "saving grain for the next season". That's a real thing that one can use in the future. There are higher-order savings as well, such as futures.
Under our arbitrary centralized monetary dictatorship, one that is coercively foisted upon us against our will (whether you agree with it or not is beside the point -- you can't opt out if you wanted to), if everyone "saves," then nothing happens. Economic activity halts. But if savings is in things of value, then to save must mean to cause economic activity.
Saying that we can either save or consume is a false dichotomy that suggests that a balance of the two isn't possible.
The problem with the current system that promotes consumption beyond our income levels is that in the medium to long term it ties up more and more of the money being exchanged as money rent (e.g. interest rates on loans, credit cards, mortgages, etc.) for many people. If you keep spending beyond your income you eventually reach the point where you know longer have disposable income because you're servicing mainly interest. I've been in such a situation myself and know many other people who have also been in a similar situation.
The problem with more and more money being tied up in financial services is that financial services are far less efficient as properly allocating capital than consumers buying what they want. One million consumers spending $1 each will better distribute a million dollars than one investment banker. The only time an investor can better allocate money is when there is demand, but there are structural reasons why a return on investment will not be seen for a long time, due to time spent on "ramp-up" activities such as construction or R&D. However even with these activities, we're now seeing a shift with financing models like kickstarter that turn the debt model on end. Kickstarter permits consumers to allocate capital more efficiently than an investor for goods and services that require up front cash.
The ideal situation for individuals and the economy in the medium to long term is to spend exactly what you earn, no more and no less. This won't produce the best short term results, but also won't result in short-term hangovers later. We waste so much potential and productivity yo-yoing back and forth between periods of under capacity and overcapacity.
Excellent questions, and I don't have an answer either. I see exhortations to spend "to help the economy" as cargo cult logic. Yes, in a strong economy indicators like consumer spending and home ownership will be high. That doesn't mean you can improve a weak economy by getting people to spend more. Although you can apparently get people to go deeply into credit card debt and buy houses they can't afford.
At the end of the day, propserity and spending are intimately intertwined. Someone has to spend money for me to make money, and I need to spend money for others to make money. Saving and investment are also intimately tied to this - at the end of the day, you need to save money up in order to be able to spend it in larger chunks.
Deficit spending lets that get turned upside down a bit, though. A line of credit lets you spend the money first, but in return you have to promise to save it plus some extra later. That's great when the loan is being used to make a good investment. A good investment being one that increases your future purchasing power, thereby meaning you can pay the loan back, plus interest, and still have more left over. In other words you're using the loan to become more prosperous, because you're making money you couldn't have made without it. And the lender is becoming more prosperous too, because they're earning interest on the money rather than just stuffing it under a mattress and letting it slowly deflate.
That's less good when you just use it to make a purchase. Then you're just agreeing to pay someone else money in return for agreeing to enable your impatience. Over the long run your purchasing power goes down because there's nothing counterbalancing those interest payments, and your own prosperity decreases.
It's downright bad when you take out a loan and use it to make a purchase that you've fooled yourself into believing was an investment. Which is a lot of what folks have been doing over the past decade. Then you become less prosperous because you wasted all the money, and the lender is likely to also become less prosperous when you ultimately default on the loan.
It's like a kitchen knife: You can use it to make delicious food, or you can drop it on your foot.
That's the part where I get stuck, because that's not true.
I can also invest my money and you could work for a company dependent on that investment.
I'd like to step away from money for a minute, and look at the way the goods themselves flow. If I grow extra grain, I could either:
(a) Make beer, and consume it.
(b) Give it to you, so that you don't have to grow anything, and you can instead spend your time improving farm equipment.
If I choose (b), I may have less beer to enjoy today, but many benefits in the following years. Maybe the next year I will have so much extra grain I can start to make other improvements, and so on, until we are all very prosperous.
It seems like (b) is the choice we should encourage, and (a) is the choice we should discourage. (b) seems like the one that actually creates economic activity, and (a) is the one that dampens it.
The economy like many complex living organism in nature. There are periods of growth, steady state and decline. The notion that organism that is not growing is failure and unnatural is just ignorant. Society should embrace periods of steady state and decline as periods of rest and recuperation,because deprivation and hunger can be good catalyst,for the next growth spurt. Actually during prosperous times people tend to be wasteful and complacent. So stop rationalizing and just accept this as the temporary new norm and recultivate the industriousness along with creativity to foster growth again.
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[ 3.0 ms ] story [ 25.2 ms ] threadThe media keeps telling us that consumption is good for the economy, and that we need a lot of spending right now (whether in the US or Greece).
I understand that the economy is a dynamic system, initial conditions matter, and that occasionally you need to kickstart it or "prime the pump". But that seems to have been lost to the general notion that we should always consume and spend more.
Does spending and consumption really lead to prosperity? What's wrong with saving, investment, moderation, and conservation?
If nothing else, this constant pressure to spend more (to the point we need to ask the government to force us to spend) has to take a serious toll on the environment. And I can't see how that level of waste actually helps anyone prosper.
The monetary system we now have creates perverse incentives. If people save, then it means they save money, which means that nothing happens. If they spend, then that causes economic activity.
Under a proper monetary system, saving would be of something of value -- saving would be of wealth, ergo economic activity would be required in order to save. But under our perverse setup, "saving" just means flipping some bits in a computer.
I would think that foregoing consumption (i.e. saving) would make it easier for someone else to borrow that money and do something more productive with it. But perhaps that's not necessarily true.
Anyway, complex issue, and I don't expect to understand it by the end of this thread.
Under our arbitrary centralized monetary dictatorship, one that is coercively foisted upon us against our will (whether you agree with it or not is beside the point -- you can't opt out if you wanted to), if everyone "saves," then nothing happens. Economic activity halts. But if savings is in things of value, then to save must mean to cause economic activity.
The problem with the current system that promotes consumption beyond our income levels is that in the medium to long term it ties up more and more of the money being exchanged as money rent (e.g. interest rates on loans, credit cards, mortgages, etc.) for many people. If you keep spending beyond your income you eventually reach the point where you know longer have disposable income because you're servicing mainly interest. I've been in such a situation myself and know many other people who have also been in a similar situation.
The problem with more and more money being tied up in financial services is that financial services are far less efficient as properly allocating capital than consumers buying what they want. One million consumers spending $1 each will better distribute a million dollars than one investment banker. The only time an investor can better allocate money is when there is demand, but there are structural reasons why a return on investment will not be seen for a long time, due to time spent on "ramp-up" activities such as construction or R&D. However even with these activities, we're now seeing a shift with financing models like kickstarter that turn the debt model on end. Kickstarter permits consumers to allocate capital more efficiently than an investor for goods and services that require up front cash.
The ideal situation for individuals and the economy in the medium to long term is to spend exactly what you earn, no more and no less. This won't produce the best short term results, but also won't result in short-term hangovers later. We waste so much potential and productivity yo-yoing back and forth between periods of under capacity and overcapacity.
Deficit spending lets that get turned upside down a bit, though. A line of credit lets you spend the money first, but in return you have to promise to save it plus some extra later. That's great when the loan is being used to make a good investment. A good investment being one that increases your future purchasing power, thereby meaning you can pay the loan back, plus interest, and still have more left over. In other words you're using the loan to become more prosperous, because you're making money you couldn't have made without it. And the lender is becoming more prosperous too, because they're earning interest on the money rather than just stuffing it under a mattress and letting it slowly deflate.
That's less good when you just use it to make a purchase. Then you're just agreeing to pay someone else money in return for agreeing to enable your impatience. Over the long run your purchasing power goes down because there's nothing counterbalancing those interest payments, and your own prosperity decreases.
It's downright bad when you take out a loan and use it to make a purchase that you've fooled yourself into believing was an investment. Which is a lot of what folks have been doing over the past decade. Then you become less prosperous because you wasted all the money, and the lender is likely to also become less prosperous when you ultimately default on the loan.
It's like a kitchen knife: You can use it to make delicious food, or you can drop it on your foot.
That's the part where I get stuck, because that's not true.
I can also invest my money and you could work for a company dependent on that investment.
I'd like to step away from money for a minute, and look at the way the goods themselves flow. If I grow extra grain, I could either:
(a) Make beer, and consume it. (b) Give it to you, so that you don't have to grow anything, and you can instead spend your time improving farm equipment.
If I choose (b), I may have less beer to enjoy today, but many benefits in the following years. Maybe the next year I will have so much extra grain I can start to make other improvements, and so on, until we are all very prosperous.
It seems like (b) is the choice we should encourage, and (a) is the choice we should discourage. (b) seems like the one that actually creates economic activity, and (a) is the one that dampens it.