The Economist magazine these days is concerned that
1. Americans have created "asset inflation" through their continuing
purchase of equities and 2. Americans are spending more than they're
saving. I must assume that equities are not considered "savings" by economists,
though laymen will consider them so. How come?
Both of the Economist's concerns are well-known, but neither
Regarding "asset inflation," many people believe that stocks are too
highly valued. Many others don't. Economics does not provide an answer
to the question of who is correct in this controversy.
Similarly, it is common to express concern that Americans are spending
more than they are saving. There are two possible holes in this concern:
(a) The measures of saving we use are highly imperfect measures of what
an economist would consider the be saving. (b) Economics does not tell
us what the "correct" level of saving is.
Anyway, these two concerns do not add up to a conclusion that equities
are not considered "savings" by economists. They most certainly do represent
savings. If you earn $50,000 per year and spend $30,000 on food and shelter
and $20,000 on stocks, you are saving 40% of your income. Putting your
earnings into stocks or bonds or bank accounts are all forms of saving.
Our official measures of saving, though, miss many important forms of
saving. Consider the following: If you spend $30,000 on food and shelter
and $20,000 on a graduate degree to help you earn income later, the official
statistics count this as consumption, not investment or saving. If an
American company owns an overseas factory whose value has doubled, this
is really a form of savings, though the statistics might not recognize
it as such. Why? The company's accounting may not require it to recognize
this increase in value until such time as the factory is sold. Nevertheless,
the increase in value is--to an economist--both income and savings.
Where layman's and economist's parlance do diverge is in whether equity
purchases constitute "investment." If you earn $50,000 and spend $20,000
to build a small factory, economists would consider this an investment
(and savings). If you spend the $20,000 to buy an existing share of stock,
this counts as savings, but not as investment. While you might call it
an investment, the economist would not. To an economist, an investment
implies the creation of something of value. In this transaction, people
have swapped things of value (money and stock), but nothing new has been
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