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Could you please expand on why its necessarily better for the average Joe to invest money (without knowing beforehand whats gonna be a "productive enterprise" o

Could you please expand on why its necessarily better for the average Joe to invest money (without knowing beforehand whats gonna be a "productive enterprise" of course) instead of fuelling the economy directly by buying goods? (honest question)

roenxi 9y ago
This doesn't quite go to the substance of your question; but it is relevant. At this point the US debt is pretty staggering at both a personal and national level. The 'average Joe' is, by the numbers, consuming more than they are producing. There are two ways this can be sustainable: 1) Transfer from economically productive to economically unproductive individuals 2) Net economic consumers become net economic producers. In practice, this would almost certainly look like spending less and investing more. The argument of my grandparent seems to be that incentivising the _reverse_ of (2), ie net producers to become net consumers, is a terrible idea that will make the fundamentals of the problem worse. That argument is good as a matter of principle. It is particularly relevant in the current context of America.
conanbatt 9y ago
Investment is what produces more wealth in the long run, and all investment is foregone consumption. If you buy less coffee but invest in a coffee maker, eventually, more coffee will be made in total, which is the real riches of a society. Saving is paramount to growth in the classic economic model.
wonder_er 9y ago
Not OP, but I have an idea of what they're getting at. Another word for savings is "deferred consumption". If I earned 1000 dollars this month, and spent 700, I have 300 in savings, or, put another way, I deferred consuming 300 of those dollars. Now, 300 in a checking account doesn't do anyone any good but me, but if I took half of that money and invested it w/the bank at a 7%/year interest rate, I'd be investing $150/month, and once I started getting that return back, I'd be getting $160.50 back. What that does for the bank is gives it capitol to loan out to businesses. If someone went to the bank and got a loan of $150, with a promise of paying it back at 9% in a year, they'd borrow that $150, pay the bank back $163.50 in a year, and the bank would pay me, the original creator of those funds, $160.50. They'd get a profit of $3.00, which is the difference between loaning that money out at 9%, and paying me back at 7%. If the bank couldn't create money out of thin air, and doesn't fraudulently loan out customer's deposits, the only way to obtain a loan would be if someone else deferred consumption. Obviously, banks can create money out of thin air (by loaning out funds on deposit), and when they do so, they don't have to give the money back with any interest, so they do. They can loan out $150 at 5% (cheaper than anyone else, perhaps!) and they can keep all of the profit, or $7.50. (more than twice the earlier profit of a non-fraudulent loan.) I suspect OP subscribes to a more "savings-based economic growth" theory, in contrast to a "consumption-based economic growth" theory. I obviously am an advocate of the savings-based approach vs. consumption-based approach. That said, the banks + federal oversight encourage money to be created out of thin air, which makes it easy to spend money, and makes it impossible to incentivize deferred consumption. So, everyone spends money, no limits on it, and we all get to ride the waves between economic booms and economic crashes. The crash is an inevitable response to the boom, and any policy that wants to have booms without crashes is a logical fallacy. I hope this helps a bit! I can gather some more sources if you're curious, but the basic gist is in accordance to the Austrian school of economics. Read more on that, and you'll encounter much better explanations than mine! :wave:
- chromatic 9y ago
  That said, the banks + federal oversight encourage money to be created out of thin air, which makes it easy to spend money, and makes it impossible to incentivize deferred consumption. So, everyone spends money, no limits on it, and we all get to ride the waves between economic booms and economic crashes. Honest question -- how does the Austrian school reconcile the slow growth of the US economy during and immediately after QE with enormous corporate warchests such as Apple's cash stockpile? I'll accept that some of this is tax shenanigans to defer US repatriation... but only some of it.
  - conanbatt 9y ago
    I'm sure austrian school purist would tell you that a storm is coming quickly to correct that insanity, if it was one.
    - chromatic 9y ago
      Thus Apple hoards cash because it believes the bubble will burst? Is that the Austrian explanation for Apple's behavior? (Still an honest question. I've never understood this about the Austrian school.)
      - conanbatt 9y ago
        Im no expert on Austrian school, but what little I read is that they have an organic view of economics, and that anything that deviates the natural flow will be corrected eventually. If the money is too cheap, it will eventually become really expensive to correct itself, and Apple might be preparing for that. Or it might be causing it. To be fair, Austrian school of economics is more occultism than anything else in the field, while Chicago School Economics (Milton Friedman&co) have more accepted models and economic ideas. The 'neoliberal' model as far as I understand can't really explain corporate cash hoarding. The situation today is very unique: historically cheapness of money could easily provoke inflation, which would promptly push any cash hoarder to spend. If the U.S. had a small spike in inflation the whole thing could change quickly.

roenxi 9y ago

This doesn't quite go to the substance of your question; but it is relevant. At this point the US debt is pretty staggering at both a personal and national level. The 'average Joe' is, by the numbers, consuming more than they are producing. There are two ways this can be sustainable: 1) Transfer from economically productive to economically unproductive individuals 2) Net economic consumers become net economic producers. In practice, this would almost certainly look like spending less and investing more. The argument of my grandparent seems to be that incentivising the _reverse_ of (2), ie net producers to become net consumers, is a terrible idea that will make the fundamentals of the problem worse. That argument is good as a matter of principle. It is particularly relevant in the current context of America.

conanbatt 9y ago

Investment is what produces more wealth in the long run, and all investment is foregone consumption. If you buy less coffee but invest in a coffee maker, eventually, more coffee will be made in total, which is the real riches of a society. Saving is paramount to growth in the classic economic model.

wonder_er 9y ago

Not OP, but I have an idea of what they're getting at. Another word for savings is "deferred consumption". If I earned 1000 dollars this month, and spent 700, I have 300 in savings, or, put another way, I deferred consuming 300 of those dollars. Now, 300 in a checking account doesn't do anyone any good but me, but if I took half of that money and invested it w/the bank at a 7%/year interest rate, I'd be investing $150/month, and once I started getting that return back, I'd be getting $160.50 back. What that does for the bank is gives it capitol to loan out to businesses. If someone went to the bank and got a loan of $150, with a promise of paying it back at 9% in a year, they'd borrow that $150, pay the bank back $163.50 in a year, and the bank would pay me, the original creator of those funds, $160.50. They'd get a profit of $3.00, which is the difference between loaning that money out at 9%, and paying me back at 7%. If the bank couldn't create money out of thin air, and doesn't fraudulently loan out customer's deposits, the only way to obtain a loan would be if someone else deferred consumption. Obviously, banks can create money out of thin air (by loaning out funds on deposit), and when they do so, they don't have to give the money back with any interest, so they do. They can loan out $150 at 5% (cheaper than anyone else, perhaps!) and they can keep all of the profit, or $7.50. (more than twice the earlier profit of a non-fraudulent loan.) I suspect OP subscribes to a more "savings-based economic growth" theory, in contrast to a "consumption-based economic growth" theory. I obviously am an advocate of the savings-based approach vs. consumption-based approach. That said, the banks + federal oversight encourage money to be created out of thin air, which makes it easy to spend money, and makes it impossible to incentivize deferred consumption. So, everyone spends money, no limits on it, and we all get to ride the waves between economic booms and economic crashes. The crash is an inevitable response to the boom, and any policy that wants to have booms without crashes is a logical fallacy. I hope this helps a bit! I can gather some more sources if you're curious, but the basic gist is in accordance to the Austrian school of economics. Read more on that, and you'll encounter much better explanations than mine! :wave:

chromatic 9y ago
That said, the banks + federal oversight encourage money to be created out of thin air, which makes it easy to spend money, and makes it impossible to incentivize deferred consumption. So, everyone spends money, no limits on it, and we all get to ride the waves between economic booms and economic crashes. Honest question -- how does the Austrian school reconcile the slow growth of the US economy during and immediately after QE with enormous corporate warchests such as Apple's cash stockpile? I'll accept that some of this is tax shenanigans to defer US repatriation... but only some of it.
- conanbatt 9y ago
  I'm sure austrian school purist would tell you that a storm is coming quickly to correct that insanity, if it was one.
  - chromatic 9y ago
    Thus Apple hoards cash because it believes the bubble will burst? Is that the Austrian explanation for Apple's behavior? (Still an honest question. I've never understood this about the Austrian school.)
    - conanbatt 9y ago
      Im no expert on Austrian school, but what little I read is that they have an organic view of economics, and that anything that deviates the natural flow will be corrected eventually. If the money is too cheap, it will eventually become really expensive to correct itself, and Apple might be preparing for that. Or it might be causing it. To be fair, Austrian school of economics is more occultism than anything else in the field, while Chicago School Economics (Milton Friedman&co) have more accepted models and economic ideas. The 'neoliberal' model as far as I understand can't really explain corporate cash hoarding. The situation today is very unique: historically cheapness of money could easily provoke inflation, which would promptly push any cash hoarder to spend. If the U.S. had a small spike in inflation the whole thing could change quickly.