>Posted by: “Norm Higgs” in MLPF
>Wed Feb 28, 2007 8:00 pm (PST)
>The problem here is that ‘Saved’ money doesn’t do the economy any good –
No, “saved money” is the capital — the foresworn consumption — by which the economy can expand.
Quick trip to Crusoe’s island that economists love so much. If Caruso needs five days to make a better fish catcher (i.e., a net), he needs to “save” five days of “food catching” so that he can “invest” in a better fish catcher. Savings is savings.
So, one of the problems of Keynesian economics is that “inflation”, (expanding the money supply by printing more fiat currency), doesn’t “save” anything to pay for the capital goods. Crusoe can’t print “fish” to eat while he weaves a net.
When money is not backed by a commodity, the market gets confused. (Actually the individuals in the market are confused as to values.) A capital project (i.e., weaving a net) looks more profitable than it really is. (Technically called malinvestment!) So, for example, with artificially low mortgage rates, I buy a house to rent that is unprofitable when there are no renters or when the Fed raises interest rates.
We “save” so little because, for example, in my gut, I KNOW that the house I bought 30 years ago for 47,000 “dollars” is not really really worth 475,000 “dollars” today. Regardless of what the tax assessor or the real estate agent says, I know that the dollars ain’t the same.
Some wall street wag christened bank cds as “certificates of depreciation”.
Sadly, savings doesn’t make a lot of sense in today’s inflationary climate. The talk about “global warming”, that’s nothing compared to all the “financial hot air” that’s being blown into the money supply.
I think this is important to MLPF because it means that business decisions, money, and deals — internationally — have to recognize that there is a significant distortion in the time value of money. So, imho, guesstimates have to have fudge factor added for inflation. I personally think it is 2% higher than the available short term certificate of deposit rate. So, if presented with a cash flow in dollars, then one can’t evaluate it WITHOUT considering the Net Present Value http://en.wikipedia.org/wiki/Net_present_value to bring future “dollars” into current “dollars” for comparison. I think investors, business people, and the ordinary joe six pack ignore the depreciation in value of their “dollars” at their own financial peril.
Posted by reinkefj 
