It's good to save, because, what we save (don't spend on consumption) is the only money available for investment. Investment is the creation of productive resources, like assembly lines, computers for research, tools for fixing things, and education to make skilled workers. Notice, please, that I said “creation” of productive resources. In other words, buying stocks from another owner of stocks is not usually real investment, as I define it, since nothing new is created. That's why the place where stocks are sold is called an “exchange.” It just changes the ownership of the assembly line or tools.
The creation of such productivity, of course, is what generates income and wealth, not only for the owners of productivity, but also for employees, contractors, the restaurants at which the employees eat, and the stores at which they shop.
Saving is good for the saver because it provides the means to buy goods today without encumbering future well-being. When we buy on credit, we are reducing our future well-being. When we use savings to buy, we have already sacrificed high living in the past.
I have recently come to recognize that buying stocks, in addition to not being investment, is also not “saving.” Unless a company issues new stock, there are (let's say, for simplicity) a constant number of shares of stock in all the companies on the stock exchange. If more people want stocks today than yesterday, then the price of stocks tends upward, just as the price of tomatoes would rise if more people want a limited number of tomatoes than previously.
From year to year there is an ever-increasing number of people in our economy interested in buying stocks and financially capable of buying them. Thus, from year to year the price of stock tends upward – until something interrupts the rise. For example, if goods are not selling and people are losing their jobs as a result, then those folks won't be buying stocks, and the price might begin to fall. If the price falls then others might become frightened and decide that they don't want to buy. Perhaps those two groups might even decide to sell stocks to generate income on which to live or to get out of a stock market that they foresee losing value. And the prices fall further.
The concept is not a lot different from betting. And betting is neither saving nor investment.
Folks don't have many options for saving.
- Stuff your money in the mattress. This, of course, doesn't contribute to the investment discussed above, since the money is unavailable to those who want to create productivity.
- Put your money in an insured institution, like a bank. The bank makes your money available to investors and to home-buyers, and even to consumers. Some of your money, therefore, is invested.
- Buy existing stocks in the exchange. As we know, this is not really saving, and it does nothing towards the generation of productivity.
- Buy new issues of stock. This is actually an investment. A company issues new shares of stock in order to build or buy a new machine, assembly line, or process, or to improve an existing one.
- Buy government securities (savings bonds, treasury bonds, etc.); i.e., loan money to the government. Some of this money would generate profits in companies that sell to the government or to government employees, thus potentially generating an incentive in those companies to invest. But the downside of this savings approach is that we will might end up paying later for the deficit spending.
Is saving dangerous?
If you have mistaken betting for saving, as many of us have done, then the vagaries of chance play too big a role, and you suffer as a result of doing something that you thought was prudent.
If you have saved in order to provide for investment, then you might still lose your money, but you have either acted like an entrepreneur, who expects to take risks. Such risks are not dependent on serendipity, but on business sense.
If you have placed your money in an insured institution, you are home free.
Ultimately, saving is the only way that our society will be viable. If Americans fail to save, then there will be no new investment, and there will be no employment, no products, and no future.
2 comments:
I disagree that saving is the only way to effect the results you're discussing. When we buy products of any sort, the company from which we're buying makes profit, which they can use to expand their business in exactly the same way as you're talking about. After all, doesn't the fed lower interest rates to spur spending in order to kick the economy into motion? I do agree that saving is important for one's own well-being later on, but why would you say that saving is better for businesses?
Profits for small businesses might go into investment. Generally, however, small businesses pay out all or most of their profits as salaries to their owners so that they can avoid corporate taxes.
Large companies must pay out their profits to the shareholders. If the shareholders spend the money, there is nothing saved.
Companies usually buy productive resources through borrowing, and then pay for it out of the proceeds from selling what the productive resources produce. That's why the current credit crunch is hurting business so much.
To the extent that a company buys productive resources directly from the proceeds of sales, then it must have saved those excess proceeds first.
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