Wednesday, February 5, 2014

Capitalism Requires Capital

I've been laid off from work, my rent is due
My kids all need brand new shoes
So I went to the bank to see what they could do
They said, sir, looks like bad luck's got a hold on you
--Simply Red

A point that seems to be lost on many: capitalism requires capital. The lifeblood of capitalism is savings, from which capital for investment springs.

Capitalism cannot and does not exist in an environment where savings rates are negative. In truly unhampered markets, declining savings would drive the price of borrowed money (i.e., interest rates) higher to better conserve and ration the savings supply that did exist. Higher interest rates would also signal opportunity associated with saving.

Stated differently, it is highly unlikely that savings could disappear--or fall to extremely low levels--in a capitalistic system.

Our present high debt, low savings environment is far removed from capitalism.

1 comment:

dgeorge12358 said...

If you put a ten dollar bill under the rug instead of spending it, that is capital formation. It represents ten dollars' worth of something that might have been immediately consumed, but wasn't.
~Garet Garrett