

If the economy is going to recover, Americans need to start taking risks again. - replicatorblog
http://www.slate.com/id/2213595/

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CWuestefeld
Can someone explain how this article isn't self-contradictory? On one hand,
"In January, Americans saved 5 percent of disposable personal in­come, up from
0.4 percent in the fourth quarter of 2007" but on the other, "We also need to
start investing again".

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/...](http://findarticles.com/p/articles/mi_hb042/is_2003_Nov-
Dec/ai_n29046313) . So it's not clear how much of this effect is due to the
current drop and how much is intentionally self-inflicted.

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shader
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.

~~~
pg
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.

~~~
shader
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.

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jwb119
Also important to point out there are some risks that we don't want to start
taking again (i.e. 35x leveraged banks)

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mmphosis
“Mother Nature doesn’t do bailouts.”

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pg
Stay tuned.

~~~
shader
Why - are you writing an essay on the topic? ;)

