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Monday, December 04, 2006

Selfish Savings

In my last post in this series about savings, debt, and money, I noted that in aggregate in a given year, we consume what we produce, and asked the question "What is Saving?" In the comments, Hey Skipper noted that savings is just financial and we had to answer what money is to really understand it. I'll come back to money later, but for now, consider the following hypothetical closed economic system. This hypothetical economy is completely stable with no loans or debt, constant population, constant demographics, constant (and moderately low) unemployment rate, constant GDP output consisting of the same products, etc. To make things a little more tangible to start, assume that gold coins are the only money and that there are no banks and all of the gold in the world has already been dug up. The people are perfectly peacefully and law-abiding so no formal (funded) government exists. There are also no corporations (all income flows directly to proprietors and partners). While the existence of this economic system is clearly impossible, I think it's important to start simple to begin understanding the issues.

Since we've specified that there is no debt, that means that each entity (personal, business, or government) saves and/or spends gold coins as they choose. Since there aren't any loans, that means that nobody makes a return on savings.

Yet people will still save quite a bit. Young people will save for retirement and/or bouts of unemployment. Retired people will draw down there savings. Business will save in order to replace capital equipment that wears out. In this perfectly stable system, each additional coin saved by someone who's young or a business saving against depreciation is exactly matched by someone who's old or temporarily unemployed who's drawing down their savings or a business purchasing capital equipment. In this hypothetical economy it has to be true. Where else would the gold coins come from?

This is the primary purpose of savings. It benefits us as individuals and businesses. It gives us the option of consuming in the future instead of today. In some sense, saving more than you need for the future is miserly, as it prevents others from saving what they need and takes away opportunity for employment from others.

One thing that's moderately interesting is that you can't necessarily substitute paper money for gold. Since it's a hypothetical system, I suppose we can do anything we want, but there might be an inherent difference. Humans seem to have an affinity for gold (giving gold inherent value) even though gold isn't all that important a material for production. Humans may or may not have an affinity to pieces of paper with numbers on them. In this closed system those pieces of paper wouldn't have any inherent value (assuming no affinity). However, in the economy of the United States, dollars do have an inherent value which I'll explain in the next post.

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