Friday, March 11, 2011

Money is not a Durable Good

Saving money and giving it to your children is something that can be done by an individual that benefits the individual child.  It's not something that we as an entire nation can do collectively.  If everyone saves a hundred dollars and gives it to their descendants, it does not improve the overall society at all.  This is also true at the government level when the government can create money at will, anyways.  It doesn't make sense for a government entity to "save" money with the intent of spending it later if it can create money at will.

There's a lot of caveats to this, but before we get to them, I want to make sure my overall point is clear.  Let's say you have an island of 1,000 people who use their own currency called "Isles".  Let's say someone came by and dropped a big 'ol pile of Isles onto the population.  They'd all have more money, but would they be better off?  Of course not, they have more money, but no wealth was created.

Now let's say that one year the people living on the island have a really good year and everyone has lots of food and luxuries.  Always mindful of the future, they decide to plan for years when there won't be lots of food and luxuries.  To do this, they all decide that everyone in the village is going to put some of their Isles money into a chest, lock it, and bury it for future use.  Now let's say 5 years later, the villagers have a lousy fishing season and must work extra hard in other areas.  Then, someone remembers the chest they saved and they all rejoice and open the chest and take out the money out and pass it around.  They'd all have more money, but are they better off'?  Of course not, they have more money, but no wealth was created.

None of the two scenarios change at all whether or not there is a government entity involved. One more look at our fictional island nation.  Let's say that the government wants to save resources a bad fishing season.  Therefore it decides to tax more than it spends for a couple years.  During this time the economy of the island goes into recession because of the extra tax burden, and the island has less wealth and more unemployment.  Now a few years later there really is a bad fishing season.  The islanders are not even worse off than in the last scenario.  Not only does the extra money not help them, but there was already a lack of good from the recession.

The only way the scenario of a generation saving money can help, is if it gets a gluttony of foreign currency from a neighboring island.  This isn't as easy as it sounds.  First of all, the people would have to agree to only sell goods to the neighboring island and not buy anything from it.  Second, the parent generation will have to hope that the money foreign money is still worth as much when they give it to their kids.  Third, once the kids try to spend it, they must find willing sellers on the neighboring island.  Of course, all of these things could happen, but the parent generation would have to put in a whole lot more work than the child generation would get back - if they get it back.

The point of this is that, as a society, one generation cannot make the next generation better off by saving money.  This only works on the individual or small community scale.  In fact, one generation can't really make themselves better off by saving money.  Money is not wealth nor is it a durable good.  Some of the things we create as a country will still be around and appreciated by the next generation when they grow up.  Money, is not one of them.

Leave a Comment