Sunday, September 25, 2011

Savings = Debt

One thing I find frustrating about the discussions about economics (debt is bad, we should save more) is that saving and debt are two sides of the same coin.

Suppose we lived in a simple world where for example, I could mow your lawn and in exchange you would take my dog for a walk. Suppose I said, well, my dog broke his leg today, can I “save” this dog walk for another day since I’ve already mowed your lawn? The only way this would work is if you would agree to “owe” me a dog walk.

In this way, debt has to exist in order to allow for saving, since by not consuming now, you are instead allowing the rest of society to “owe you one later”. Whether this takes the form cash or dog walking certificates, the bottom line is that debt generally needs to exist in order for any kind of saving to happen.

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