Friday, December 9, 2016

Net worth or slack!

You earn and save . You save and you invest. The more money you have the safer you feel about the future.

Net worth of a person or a company or a country can be seen in various ways.

One of the most common assumptions of capitalism is that net worth of a person is equal to the value he/ she has contributed to the society. whether it is true or false or where it is true and where it is false is a different debate.

This post is about a second interpretation.

Your current net worth is like a buffer or inventory you keep because of the uncertainty of the future demand of money in your life or that of your family. money is a store of value which you can exchange later.

Now imagine a factory which keeps a lot of inventory in between its processes. would you call it an efficient factory. of course it is less susciptible to overall breakdown because every machine in the work line has enough inventory in betwwen them so that even if one part breaks down others continue to work on their buffer inventory. so it is safe but not efficient.

similarly in an economic system if each person becomes a saver of net worth and not a utilizer then the system becomes slow and heavy and not efficient. i guess that is why most advanced economies try to make future spendings for your life deterministic with low inflation, insurance for everything government support for the mis fortunate etc. if you take care of the uncertainties people will save less and the money cycle will flourish.

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