Quote from Cutten:
The idea that savings *intrinsically* create economic value relative to consumption, or vice versa, is clearly wrong. If it were true, then the logical course of action would be to save all your money and never spend on anything at all; or to spend every last cent you have as soon as it arrives in your bank account, and never save. Both courses of action would lead to disaster for the vast majority of cases, which is why virtually no one does this.
Consumption creates value - by definition you judge that what you consume is worth more than its market price, otherwise you wouldn't buy it in the first place.
Savings which are invested profitably also create value. You put in x and get back more than x. Again, you would not save if you did not expect it to create value for you.
So it is simply a question of which of the two alternatives creates *more* value. I.e. in your current situation, will one additional dollar spent on consumption give you more or less value than investing that same dollar for a future return?
Across the economy as a whole, the relative attractiveness of consumption vs saving will be shown up by consumer and business preferences between the two. If people are spending more and saving less, then that is a pretty clear vote that spending is more attractive, and thus value creating, for them.
Aren't you making a gross generalization here?
Consumption does not automatically create value in a long term economic sense- it depends entirely on how the money is spent. Personal consumption choices can be value neutral or even value destroying.
If a farmer spends $50,000 on a new combine and improves his operating margins through increased productivity and higher yield, value is created. If the farmer decides to spend 50K on blackjack and hookers instead, it's not quite the same thing.
For a less extreme example, imagine you are a small business owner who had a financial windfall in the third quarter. You are debating whether to use the money to expand your business, or finance a sailboat with the windfall as a downpayment. Again, the value propositions in a long term economic sense are far from equal.
Consumption decisions can also create voluntary wealth transfer between nations. Again to express through analogy, imagine poor country A stumbles onto a lucrative business exporting billions of dollars worth of legal narcotics to rich country B.
Imagine country A then uses its substantial drug revenues to maximum long term benefit: build infrastructure, increase educational levels, upgrade technology, expand enterprise etc. Meanwhile country B gets high and watches MTV.
Given enough time, country A becomes rich and country B becomes poor, because of
consumption choices that bear dramatic effect over the long term.
The current situation isn't that extreme, but with American consumers encouraged to buy high definition TV's and gargantuan SUV's and other goods of nil long term economic value, maxing out the home equity line all the while, I think you can see how the situation is similar.
America currently has a consumption choice problem and a soft spot for Ponzi schemes. We have chosen and continue to choose to spend large chunks of capital on frivolous items that do not represent long term value, and we are paying for our credit binges through high debt service costs that represent even greater value destruction. The US is essentially living high on debt, and the debt payments are ultimately being used to finance long term growth of other nations who are making better consumption choices than we are.
We are going to pay through the nose not because we have been screwed or duped by Asia, but because we have spent a lot of borrowed money on useless shit and our bad economic choices are going to have long term economic effect. While we may not become poor any time soon, our consumer addiction to imports and pollyanna view of debt is playing a part in their rise and our decline. I am pro free trade but anti debt binge.
Bad choices always have consequences.
