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Current time:0:00Total duration:9:51

Video transcript

I've been wanting to make a video on a couple of terms that people have really thrown around for a while now and I think it really hits the core of some of the issues we're dealing with now with the credit debacle but it's kind of at a at a deeper level so the things I want to go over the ideas of savings savings consumption consumption and investment and you hear these a lot everyone obviously says well I've invested in the stock market or I've invested in a house and I really want to give you a a framework for how I think about these ideas and frankly I haven't seen them depicted this way in in any economics book although they've kind of touched on this but I think this is really how you should think about these things so if you save money you know and I think we all know what that means that's money that you didn't spend there's a couple of things that you can do with it you can either consume your money or you can invest your money so let's just think about a bunch of different situations and think about whether those things are consumption or investment so let's say let's say I have I know it's a hundred thousand dollars that I'm I'm dealing with so let's say I pick that hundred thousand dollars and I build a factory I build a factory and I think that that Factory is going to be able to produce I don't know I'll make up some product it'll be able to produce cars more efficiently and cheaper than any other car factory out there well I think this we'd all agree that this is this is an investment and why is it an investment because I'm taking this hundred thousand dollars and I'm putting it to some use that is creating hopefully more value than my original one hundred thousand dollars in fact I'm expecting some type of a return on this investment and I've made a bunch of videos on what a return on investment is and you can usually quantify it right if I take a hundred thousand dollars and I build this factory and this factory spits out 50 thousand dollars a year it's probably creating at least $50,000 a year value assuming that nothing what is happening in our system in fact it's normally creating more than $50,000 a year values maybe creating a hundred thousand dollars a year of value fifty thousand of that maybe is going to the person who's doing the production and then the other half of the value is actually going to the consumer of whatever this factory is making you have to think about it because if all of the value went to the person who produced the factory then there's not a huge incentive for someone to use its products anymore but anyway that's not the topic of this discussion we're just trying to get a a mental framework on what consumption is versus investment so I think we all agree that if I were to if I were to build a factory that this is let's say I'll do everything in green as investment so building a factory is an investment now let's say that I I don't know I'm homeless I'm homeless and I have this hundred thousand dollars and because I'm homeless I don't have a place to go and eat dinner and rest and relax and because I don't have that I can't get a job and I can't become a productive member of society so maybe I'm going to use this hundred thousand dollars to buy a simple house that meets all of my needs so let's say build a simple house and I'll do that in a neutral color build build a simple house simple house so this is my other use of this hundred thousand dollars instead of building a factory I'm going to build a simple house and this house it provides shelter for me and my family it allows us that that kind of security that now my kids can go to school and they can themselves become more productive citizens I now have an address I can I have a place to take a shower that allows me to go get a job and I can now create value for society as a whole instead of being you know on the corner and and and begging for money from people I would argue that this is also an investment why is it because I'm taking this hundred thousand dollars that maybe I had or someone gave to me I'm taking this hundred thousand dollars and it's generating a return and what is that return well in a factory it's maybe a little easier to quantify but at minimum it's this work that I'm able to do because I now have a house because I have the security I have the address I have the shelter I'm able to relax it's that security and it's also the return that probably my kids are going to be - now contribute to society maybe if they grew up homeless they would have never been able to contribute and now that they had a roof over their head and they're able to go to school etc they are able to give some economic value back to society it's hard to value you know maybe I didn't have any job before and now I have a job and I can contribute thirty thousand dollars a year to society maybe I'm working at someone's factory maybe I'm providing some other maybe I'm a farmer now whatever I'm providing some source of value and maybe my kids if they never got an education they would have you know been maybe they could have made added ten thousand a value per year to people and now they can add twenty thousand of value so that difference would also be some of the return on this investment so I also consider this to be an investment now my question to you is let's say that I already had a house this is an investment let's say I already had a house and my family is happy and we have everything we need we have food on the table and my kids go to school and I'm able to get a job and all of that exists but let's say I still have a hundred thousand dollars and I use that hundred thousand dollars I'll do it in yellow again another neutral color and let's say I use that hundred thousand dollars to put some granite countertops granite countertop so I have some money left over let's say I'm gonna add a bathroom and a bathroom to my house and I will I don't know I'll put the the latest hardwood floors just so that I'm so that my family will be impressed hardwood floors and and you can imagine and maybe I add I add 2,000 square feet you normally can't get all of that for a hundred thousand dollars but I think you'll bear with me so I'm essentially doing some major home improvements so my question to you is this an investment or is this consumption now in our everyday world the way with most people we deal with they will call this oh I've invested in my house and why are they saying that because they say by spending a hundred thousand dollars in in the house in this way that maybe you know if you've watched the home and garden Channel they're doing this all the time that if you know if you if you pour this one hundred thousand dollars into your house that may be the value of your house is going to increase by one hundred fifty thousand dollars or someone else all of a sudden is going to perceive the value of your house as being you know 150 and they'll say well you got a $50,000 return on investment I'd argue that that is not investment that is speculation you are essentially piling money into this stuff and I'll do this in read consumption is in red so this is consumption consumption is red what's happening here truly economically when you add granite or you add an extra bathroom or hardwood floors to this extra 2,000 square feet is it making anyone who's living in that house more productive is it making you harder working is it making you more likely to invent the cure for cancer are more likely to invent a way of getting cheap energy or or produce more widgets no it's it's just if anything providing more things for you to have to take care of that you're not gonna be able to focus as much on your work or more energy is going to have to be expended to maintain this type of place I mean to heat and cool a 2,000 square foot house so if anything by actually pouring the hundred thousand dollars here you're actually creating something that is going to suck more on a society in fact in no way is this going to contribute to the collective wealth of society the last two examples I gave contribute to the collective wealth of society some of which you share and that is your return on the investment but as a whole this is an investment into society it's going to create a UH it's going to make the pie bigger this right here does not make the pie bigger it might make you a little bit happier make your ego feel a little bit better and let your let your pride grow and your self-righteousness grow and show other people that you've arrived but it's not going to increase the wealth of society and when you say that you've invested you're really just saying I've speculated I what you're saying is by paying this hundred thousand dollars you're going to find essentially a greater fool out there who you know before they could have done the same thing they could have bought your house spent a hundred thousand dollars and done this if this is what would have made them happy but what you're saying is essentially that you're gonna find somebody out there who's willing to pay a hundred fifty thousand extra dollars for something that should have only costed a hundred thousand dollars and if anything if you use this at all the value of this is going to go down so you just somehow assuming that and you're assuming that the ground granite countertops that you choose are gonna be the taste that someone else would like or that the hardwood floors are gonna be the taste that someone else's like I would actually argue that when you customize your house in this way you are you are creating $100,000 of consumption to your taste and I would be surprised if someone else truly is willing to pay more than $100,000 unless they are being in some way irrational order they can finance this because it's being it's part of the the mortgage anyway this is I think just the big picture investment adds value to society investment a simple house adds value to society consumption is something where you people might call it an investment because it's kind of speculation it might find some other guy who's willing to emotionally pay more for something but it is not in any way it's money that's burned it's not creating more value for a society I'll continue this in the next video