A Simplified Primer on Spending,
Consuming, Saving, and Investing
Consuming, Saving, and Investing
by Ed Warshawer,
Special to Channeling Barack Obama™
Until our leaders and pundits learn the difference in the ways money can be spent, the U.S. will continue to wrestle with the simplistic, ideological issue of whether “to spend,” like a Liberal Democrat, or “not to spend,” like a Conservative Republican.
We go round and round, and we get nowhere. We don’t ever settle the debate. And given the minimal level of economic understanding in the country, this is no surprise.
Spending comes in three basic forms:
Consuming is the kind of expenditure that Conservatives talk about when they use the term, “spending.” This kind of expenditure pays for something that is purchased and used, and then is gone forever.
When Republicans talk about hiring people to dig holes and fill them back up, that’s an excellent example of consumption. It may feel good immediately, like a triple-dip ice cream cone. But once the money is spent and the ice cream is gone, only memories and a stomachache remain.
And, of course, the credit-card bill, or the I.O.U., or the National debt.
Saving is the kind of expenditure that Americans in general talk about when they use the term, “investing.” Saving of course means putting money into a bank account or a Treasury bill or a corporate bond: money that earns interest while being set aside for future use. But “saving” also means something else.
Americans usually say that they are “investing” when they buy stock, or index funds, or other mutual funds. Many people don’t seem to realize that when stock shares are bought on the stock market, the money does not directly affect the underlying company. Except when buying part of an initial offering of stock, the money that you “invest” in stock actually goes directly into the pocket of another investor.
Thus, when you buy stock, you are “saving” your money by setting it aside for some future time.
The main difference between “saving” in a bank and “investing” in stock is this:
The bank account maintains the nominal value of what you put into it, while providing interest that you hope will outpace the rate of inflation.
In other words, if you put $100 into a Certificate of Deposit, when you get your money back, it will be more than $100. But you don’t know ahead of time whether your money plus interest will still buy what the original $100 would have bought at the beginning.
The stock account lets the value of your purchase vary, growing and shrinking at various times, while providing a combination of dividends and a growing price. Such a combination has a better chance of outpacing inflation, but it is less-likely to be the same nominal amount that it was when you bought the stock.
In other words, if you buy $100 worth of stock, when you go to sell it the total price will probably be some different number, either more or less than the $100.
Both of these items represent savings: the putting aside of money for some future use. They just have different risks and advantages.
True “investing” means putting some resource to use to create something more—something greater—than what existed before your investment.
In this real “investing,” when you put some money into starting up a company—and you receive stock in exchange for your investment—you are participating in an opportunity for real growth.
Unlike what we generally mean when we use the term, investing, where you just buy some stock that someone else already owns—which makes nothing new for the underlying company—real investing creates opportunity, and synergistic possibilities for a better future.*
Other forms of real “investing” that are commonly mentioned these days include:
Some of these forms of “investing” are exactly what Conservatives mean when they complain about “big spending” by Liberals. Conservatives may be correct in thinking that some of these investments may not be the best investments. But they are mistaken in the confusion between “spending” and “investing.”
In looking at the current economic crisis—and what we can and need to do about it—one thing that we ought to avoid is this foolish argument over “spending.” When the Republicans say “spending,” they mean wasteful “consuming.” When the Democrats say “spending,” they mean “investing.” But both Democratic and Republican investment choices are too-often clouded by the failure to distinguish between actual “consuming” and true “investing.”
True investing consists of funding capital projects that are likely to yield synergistic benefits in the future. In this, the Democrats are right. But those programs that do not promise to yield such benefit ought not to be undertaken right now. At least not as part of a “stimulus package.” In this, it is the Republicans who are right.
A good example of investing in a capital project is the building of roads and bridges and government buildings. When you invest in such things, you not only borrow the money from the future, you also borrow the expense from the future. As George Bailey pointed out in It’s a Wonderful Life, when you buy a structure on credit, you get the benefit of it now, while you’re paying for it, rather than waiting until you can pay for it—and may no longer need it—in the future.
The roads we build today, just like the wonderful, old WPA projects still standing all over the country eighty years after the Great Depression, will save our grandchildren the expense of building them in the future.
When you actually invest—rather than when you consume—you actually do invest in a better and brighter American future.
_____
*In fact, this idea of improving the future is so important that it actually is a required part of the charter of public corporations. Really. This corporation thing is not just about taking money out of the hands of the public. Incorporation is about “contributing to the common good.”
We go round and round, and we get nowhere. We don’t ever settle the debate. And given the minimal level of economic understanding in the country, this is no surprise.
The Three Basic Forms of “Spending”
Spending comes in three basic forms:
1: ConsumingHere’s how each one works:
2: Saving
3: Investing
CONSUMING
Consuming is the kind of expenditure that Conservatives talk about when they use the term, “spending.” This kind of expenditure pays for something that is purchased and used, and then is gone forever.
When Republicans talk about hiring people to dig holes and fill them back up, that’s an excellent example of consumption. It may feel good immediately, like a triple-dip ice cream cone. But once the money is spent and the ice cream is gone, only memories and a stomachache remain.
And, of course, the credit-card bill, or the I.O.U., or the National debt.
SAVING
Saving is the kind of expenditure that Americans in general talk about when they use the term, “investing.” Saving of course means putting money into a bank account or a Treasury bill or a corporate bond: money that earns interest while being set aside for future use. But “saving” also means something else.
Americans usually say that they are “investing” when they buy stock, or index funds, or other mutual funds. Many people don’t seem to realize that when stock shares are bought on the stock market, the money does not directly affect the underlying company. Except when buying part of an initial offering of stock, the money that you “invest” in stock actually goes directly into the pocket of another investor.
Thus, when you buy stock, you are “saving” your money by setting it aside for some future time.
Saving in a Bank or a Bond
The main difference between “saving” in a bank and “investing” in stock is this:
The bank account maintains the nominal value of what you put into it, while providing interest that you hope will outpace the rate of inflation.
In other words, if you put $100 into a Certificate of Deposit, when you get your money back, it will be more than $100. But you don’t know ahead of time whether your money plus interest will still buy what the original $100 would have bought at the beginning.
Saving in the Stock Market
The stock account lets the value of your purchase vary, growing and shrinking at various times, while providing a combination of dividends and a growing price. Such a combination has a better chance of outpacing inflation, but it is less-likely to be the same nominal amount that it was when you bought the stock.
In other words, if you buy $100 worth of stock, when you go to sell it the total price will probably be some different number, either more or less than the $100.
Both of these items represent savings: the putting aside of money for some future use. They just have different risks and advantages.
INVESTING
True “investing” means putting some resource to use to create something more—something greater—than what existed before your investment.
In this real “investing,” when you put some money into starting up a company—and you receive stock in exchange for your investment—you are participating in an opportunity for real growth.
Unlike what we generally mean when we use the term, investing, where you just buy some stock that someone else already owns—which makes nothing new for the underlying company—real investing creates opportunity, and synergistic possibilities for a better future.*
Other forms of real “investing” that are commonly mentioned these days include:
“Investing” in education, in the effort to make better citizens, capable of creating a better future for the country.
“Investing” in roads and bridges, so that people and products can get to markets and to each other.
“Investing” in family planning, so that people do not have so many children that they cannot afford to care for them, and thus create an economic or social burden on society.
“Investing” in the space program, which yielded tremendous new products and opportunities ranging far beyond the specifics of putting people on space stations and the moon.
Some of these forms of “investing” are exactly what Conservatives mean when they complain about “big spending” by Liberals. Conservatives may be correct in thinking that some of these investments may not be the best investments. But they are mistaken in the confusion between “spending” and “investing.”
Capital Investing Versus Government Spending
In looking at the current economic crisis—and what we can and need to do about it—one thing that we ought to avoid is this foolish argument over “spending.” When the Republicans say “spending,” they mean wasteful “consuming.” When the Democrats say “spending,” they mean “investing.” But both Democratic and Republican investment choices are too-often clouded by the failure to distinguish between actual “consuming” and true “investing.”
True investing consists of funding capital projects that are likely to yield synergistic benefits in the future. In this, the Democrats are right. But those programs that do not promise to yield such benefit ought not to be undertaken right now. At least not as part of a “stimulus package.” In this, it is the Republicans who are right.
The Value of Actual Investment
A good example of investing in a capital project is the building of roads and bridges and government buildings. When you invest in such things, you not only borrow the money from the future, you also borrow the expense from the future. As George Bailey pointed out in It’s a Wonderful Life, when you buy a structure on credit, you get the benefit of it now, while you’re paying for it, rather than waiting until you can pay for it—and may no longer need it—in the future.
The roads we build today, just like the wonderful, old WPA projects still standing all over the country eighty years after the Great Depression, will save our grandchildren the expense of building them in the future.
When you actually invest—rather than when you consume—you actually do invest in a better and brighter American future.
© 2008 Ed Warshawer
Used by Permission
Used by Permission
_____
*In fact, this idea of improving the future is so important that it actually is a required part of the charter of public corporations. Really. This corporation thing is not just about taking money out of the hands of the public. Incorporation is about “contributing to the common good.”
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