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Savings and investment

Savings and investment. Foldvary, Econ 2. Time Preference. the general preference of people for goods in the present time relative to goods in the future. Why: 1) finite life span, 2) uncertain future. The natural rate of interest.

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Savings and investment

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  1. Savings and investment Foldvary, Econ 2

  2. Time Preference • the general preference of people for goods in the present time relative to goods in the future. • Why: 1) finite life span, • 2) uncertain future.

  3. The natural rate of interest • The rate at which goods are discounted into the future constitutes the rate of interest. • In equilibrium, the natural interest rate makes savings equal to investment.

  4. Loanable funds • Savings available to borrowers. • The supply of loanable funds is savings. • The demand is from borrowers. • Some borrowing is for consumption. • Net savings is total savings minus borrowing for consumption. • Net savings equals investment.

  5. Debt service • pure interest: real interest. • inflation premium. • risk premium (for bad loans) • fluctuation risk, long-term bonds. • tax premium

  6. The stock market • Equity finance. Equities. • Retained earnings: profits held. • Double taxation of corporate profit. • Double taxation increases corporate debt and retained earnings.

  7. Depositors are lenders • Your deposits become loans to others. • A check is a loan. • Paying with a credit card is borrowing. • The seller pays a fee.

  8. Mutual funds • A portfolio is a set of assets. • A mutual fund is a corporation that owns a portfolio of stocks, bonds, and other assets. • Mutual funds enable diversification and professional financial management.

  9. Government savings • Governments also save and borrow. • National savings includes both private and governmental savings. • Governments with budget deficits have negative savings, or dissavings. • S = (Y-T-C) + (T-G), private savings plus government savings. T: taxes.

  10. Effect of government borrowing • Government competes with private enterprise to sell bonds. • Government borrowing crowds out private borrowing. • There is less investment, less growth. • Unless government borrowing is for productive investment.

  11. The structure of capital goods • The time structure, like a stack of pancakes. • Higher on the stack: longer held. • Higher order goods, more responsive to the rate of interest. • Lower interest rates make the stack taller. • The creation of money acts like savings, • but results in wasted investments.

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