If I have 9 cows and a bull and the yield is 1 calf per year, year after year, there is no reason why I should borrow anything. But if, by building a shelter, I could increase that to 2 calves per year it would make sense to borrow and build. But only if interest, annual principal repayment and my living expenses added up to less than 2 calves.
You are at all times free to stash away for a rainy day, no return on those savings of course, most probably negative earnings. Still your sole prerogative.
But if you want a return on your savings you have to find somebody, directly or indirectly, that has a way to invest in increased rate of value creation. Such savings cannot be pushed, it has to be pulled, that privilege is the borrower's.
In other words saving is either:
- Stashing away while accepting loss of value or
- investment in increased output of useful products and services.
But at some point of time we got used to getting a return, to the point where we're now hardwired to believe that we can save at any time and get a return from the savings. But as opportunities to invest in increased value creation comes in leaps and bounds, like when a new technology or method is invented, saving with a return should not always to be had.
That opened for new professions to create "saving forms" decoupled from investing in increased value creation. In other words, savings that mostly could be termed humbug.
And the humbug could take three forms:
- Investment in scarcity. Expensive watches, art, real estate, gold. Investing in a flat on Manhattan makes sense as long as there is increasing value creation elsewhere in the society, wealth that flows into New York eventually in the form of people moving there. But soon that could turn and the zero-sum game becomes a reality. And I'm not saying art and the other scarce products do not have a value, they have, but they do not increase the value creation and should not yield a real return. Having been conditioned to believe something does not necessarily make it true. "Gold? Dig it up, then bury it, then dig it up, and bury it again, so where's the value creation?"
- Power leverage. You're sitting on excess funds today while the younger generation struggles. That creates an opportunity for you to lend it to the younger generation for their consumption today, then sit back and see them work twice as hard as you had to in order to pay back with interest. They have little choice, you can push through high interest, hence the power leverage. (In fact much of the scarcity investing is a version of this, sell your inflated value big house to a young family and you get the point.)
- Schemes and fakes. Read any paper from last nine months and take your pick among the disaster "instruments" for further study.
There is only one way out of this crisis and the saving-investment need mismatch; find the balance. That can be had by less saving or increases in value creation. Everything else is a waste of time or at best band-aiding a broken leg.
In the latter part of the last century the US personal saving rate was much higher than today, but then it was a period of huge investment needs world-wide in infrastructure, new manufacturing methods and equipment including IT - all increasing the world's value creation. The last few years we've seen much lower saving rates, more matching the lack of opportunities to invest in value creation increases. But then, typically China and the oil producing countries saved huge amounts that increased the imbalance tremendously despite low saving rates in the US.
Good thing that the world's governments seems to be well underway to do their part in the investment bit, hope is that it's towards real increases in value creation. Bad thing is that saving is increasing as well.
At the end of the day, the way to find the balance is to remove the universal notion that we have a prerogative to save with a return while exposing the "humbug" saving for what it really is. That would be the only long term fix.
[Hat tip to my friend Pete (url free alas) who prompted the discussion.]