Thursday, March 27, 2008

Where Did We Go Wrong?


SAVINGS AND THE AMERICAN ECONOMY

Wednesday, March 26, 2008 - FreeMarketNews.com
A while ago David Malpass, financial writer and chief economist at Bear Stearns, (and I do mean that Bear Stearns) argued that US savings are under reported because they exclude "cash flow improvements from realized gains on equities, houses, and mortgage refinancing." Now I am not referring to Malpass as a means to take a swipe at Bear Stearns and the quality of its advisors: that's the market's job. What Malpass did was to inadvertently draw attention to the confusion that reigns among the economic commentariat with respect to the nature of saving and its critical importance for economic welfare. Most economists define savings as deferred consumption. But this is a very misleading definition that confuses the demand to hold cash with savings. To the Austrian school of economics savings is a process that defers present consumption in favour of greater future consumption by expanding the capital structure and by doing so increases future output. This definition clearly excludes cash balances. Using the Austrian definition we see that "cash flow improvements from realized gains on equities" cannot in themselves be defined as savings. To be savings they must be invested.

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