If the economy is going to recover, Americans need to start taking risks again.(slate.com)
slate.com
If the economy is going to recover, Americans need to start taking risks again.
http://www.slate.com/id/2213595/
5 comments
Unfortunately, the reason that we are in this recession is that people took too much risk. We have been living with a net negative national savings rate for a while now. That consumption of capital is partly what has allowed this downturn to occur. We need to be saving now more than ever.
Also, there is no paradox of thrift. When people save, it does not mean that they do not produce, merely that they are refraining from consumption. And at a savings rate of five percent, we are hardly refraining at all.
Normally the higher savings (refrain from consumption, higher interest in future goods over present ones) would cause businesses to invest more in longer term production, i.e. making more future goods. Thus a higher savings rate is responsible for a higher future standard of living, and more risk taking. So attacking the savings rate and saying that we shouldn't be so careful is a terrible idea.
That said, businesses are still likely to take too much risk because of the low interest rates. The way that the higher interest in future goods signals the companies is normally through lowering interest rates, which the federal reserve has done recently even though there has not been a corresponding increase in savings. This imbalance between business expectations and actual consumer desires is what causes booms and busts.
So please don't tell me to be risky with my money. I'm not saying that taking advantages of opportunities is a bad idea. I like the idea of being an entrepreneur myself. But telling us that a five percent savings rate will cause our depression to get worse is like telling a sick person that taking a 15 minute nap will make them more sick. They probably need a lot more sleep than that, and encouraging otherwise may prove disastrous.
Also, there is no paradox of thrift. When people save, it does not mean that they do not produce, merely that they are refraining from consumption. And at a savings rate of five percent, we are hardly refraining at all.
Normally the higher savings (refrain from consumption, higher interest in future goods over present ones) would cause businesses to invest more in longer term production, i.e. making more future goods. Thus a higher savings rate is responsible for a higher future standard of living, and more risk taking. So attacking the savings rate and saying that we shouldn't be so careful is a terrible idea.
That said, businesses are still likely to take too much risk because of the low interest rates. The way that the higher interest in future goods signals the companies is normally through lowering interest rates, which the federal reserve has done recently even though there has not been a corresponding increase in savings. This imbalance between business expectations and actual consumer desires is what causes booms and busts.
So please don't tell me to be risky with my money. I'm not saying that taking advantages of opportunities is a bad idea. I like the idea of being an entrepreneur myself. But telling us that a five percent savings rate will cause our depression to get worse is like telling a sick person that taking a 15 minute nap will make them more sick. They probably need a lot more sleep than that, and encouraging otherwise may prove disastrous.
More like they took the wrong kind of risk. The problem was that people were expending their future incomes on present consumption-- e.g. by borrowing money to live in luxurious houses. It would not have been so bad if they'd been been borrowing money to invest it in productive assets, like more efficient machines for their businesses.
Indeed. I didn't say that risk was bad, necessarily. Rather, encouraging risk to avoid a non-existent paradox of thrift is a dangerous thing. Personally, I think that the news about people losing less money at casinos is a good thing. They are much more likely to be able to invest it in worthwhile endeavors having not lost it ;)
Also part of the problem is that everyone was consuming their present and future income (negative net savings rate) - as opposed to some borrowing and consuming the present savings of others. As such we were actually consuming present capital and reducing our future income, as evidenced by the recent downturn.
Also part of the problem is that everyone was consuming their present and future income (negative net savings rate) - as opposed to some borrowing and consuming the present savings of others. As such we were actually consuming present capital and reducing our future income, as evidenced by the recent downturn.
Absolutely 100% agree.
As I mentioned in my other comment - this is why I'm pretty suspicious of measures that are to (simply) stimulate consumption and not production. At best this is really an extremely short-term stopgap.
As I mentioned in my other comment - this is why I'm pretty suspicious of measures that are to (simply) stimulate consumption and not production. At best this is really an extremely short-term stopgap.
"When people save, it does not mean that they do not produce, merely that they are refraining from consumption."
Every transaction has two sides. Either somebody has to consume what you've just produced, or it goes into inventory. Inventory storage capacity is finite, and you see these major price crashes and production cuts (like in housing, or oil) when inventory reaches levels that are no longer sustainable.
Every transaction has two sides. Either somebody has to consume what you've just produced, or it goes into inventory. Inventory storage capacity is finite, and you see these major price crashes and production cuts (like in housing, or oil) when inventory reaches levels that are no longer sustainable.
Certainly. But by saving you allow someone else to consume what you have produced, and you refrain from consuming things yourself. This permits businesses to invest in future production even if you don't personally do it.
Investment is a consumption, and it does involve risk. But to say that Americans in general need to take more risk with their money is rather foolish if you ask me. Especially when the aforementioned savings rate is at a paltry five percent.
Investment is a consumption, and it does involve risk. But to say that Americans in general need to take more risk with their money is rather foolish if you ask me. Especially when the aforementioned savings rate is at a paltry five percent.
> Unfortunately, the reason that we are in this recession is that people took too much risk.
Actually, we disconnected risk from reward.
Actually, we disconnected risk from reward.
Correct.
This is why I'm not really a big fan of stimulus incentives that essentially hand out money for people to spend - i.e. stimulate consumption.
What we need to stimulate is innovation + production (better, quicker, faster, cleaner ways to doing things).
N.B. Stimulating consumption isn't necessarily a terrible idea when it has a downstream impact on production. In fact, this lets the market drive innovation, which historically has been a good idea.
The problem is the credit environment really screwed with this -- "Wealth" was appearing that wasn't tied to some genuine increase in production. Usually this works. Extend some credit, someone builds something new/cool and we've created wealth. It doesn't work when it just leads to increased leverage.
.. And so this vanished, because it wasn't really there.
Everything has a cycle + I think it's time to turn away from stocking the consumption boiler and boost grass-roots innovation.
This is why I'm not really a big fan of stimulus incentives that essentially hand out money for people to spend - i.e. stimulate consumption.
What we need to stimulate is innovation + production (better, quicker, faster, cleaner ways to doing things).
N.B. Stimulating consumption isn't necessarily a terrible idea when it has a downstream impact on production. In fact, this lets the market drive innovation, which historically has been a good idea.
The problem is the credit environment really screwed with this -- "Wealth" was appearing that wasn't tied to some genuine increase in production. Usually this works. Extend some credit, someone builds something new/cool and we've created wealth. It doesn't work when it just leads to increased leverage.
.. And so this vanished, because it wasn't really there.
Everything has a cycle + I think it's time to turn away from stocking the consumption boiler and boost grass-roots innovation.
Unfortunately, I don't think that stimulating production or innovation is a good idea either.
When you just stimulate production, it is true that production will increase but not in a way the consumers actually want. The evidence for this is that production has been stimulated (along with consumption) for a long time due to artificially low interest rates. The housing boom is a boom in production of houses.
"booms" in general are caused by the illusion that there are more savings than in reality exist - i.e. lowered interest rates, easy loans, etc. This causes the business to over invest, thinking there is enough in the way of resources to do so, and the consumer to consume more, thinking the same thing. Unfortunately, because the lower interest rate does not coincide with increased savings the businesses soon find out that there are not enough resources to complete their projects. This is when the boom starts to stagnate. In the late '90s, the scarce resource was programmers and IT employees, who were increasingly hard to find as businesses continued to hire them all for new internet projects.
Artificial stimulation is a very bad idea in either case, consumption or production. It is especially bad when you stimulate both at once.
However, I don't think you have to worry about innovation too much. Especially in this period of economic decline, people will be able able to innovate even without stimulation ;)
When you just stimulate production, it is true that production will increase but not in a way the consumers actually want. The evidence for this is that production has been stimulated (along with consumption) for a long time due to artificially low interest rates. The housing boom is a boom in production of houses.
"booms" in general are caused by the illusion that there are more savings than in reality exist - i.e. lowered interest rates, easy loans, etc. This causes the business to over invest, thinking there is enough in the way of resources to do so, and the consumer to consume more, thinking the same thing. Unfortunately, because the lower interest rate does not coincide with increased savings the businesses soon find out that there are not enough resources to complete their projects. This is when the boom starts to stagnate. In the late '90s, the scarce resource was programmers and IT employees, who were increasingly hard to find as businesses continued to hire them all for new internet projects.
Artificial stimulation is a very bad idea in either case, consumption or production. It is especially bad when you stimulate both at once.
However, I don't think you have to worry about innovation too much. Especially in this period of economic decline, people will be able able to innovate even without stimulation ;)
Certainly. The two things are rather related: if you remove the appearance of danger, people will get themselves into more tight spots. It's amazing how many more people with four wheel drive get stuck in mud than normal cars ;)
Also important to point out there are some risks that we don't want to start taking again (i.e. 35x leveraged banks)
“Mother Nature doesn’t do bailouts.”
Where are those additional savings going? Barring folks stuffing the money under their mattresses, it must go into some investment instrument, which means it's going into either equity or loans to businesses, or into banks where it goes into loans to businesses or consumers (other than banks building up a buffer against the risks they're finally recognizing). If those loans go to consumers, they must obviously get spent. If we're talking about any of corporate equity, corporate debt, or bank loans to companies, all three of these things are investments in future production. The only discrepancies should be those bank buffers, and any investments going overseas. Money always gets spent, it's really just a question of how quickly, and on what.
Also, "Last year, Delaware ... saw new incorporations drop by 25 percent [relative to what?]." Well, at least part of this is our own doing. This has been going on for several years, but new incorporations have been down for several years to the costs and risks that were added by Sarbanes-Oxley. See, e.g., here http://www.nysun.com/opinion/reclaiming-the-market/46366/ and here http://findarticles.com/p/articles/mi_hb042/is_2003_Nov-Dec/... . So it's not clear how much of this effect is due to the current drop and how much is intentionally self-inflicted.