Most often the saving required to support new investment occurs well after that investment is made. Thus, a large part of savings comes from the foresight of entrepreneurs in correctly assessing the future demands of consumers.
To expand upon this assertion. What this means is that in a complex economic society increases in investment come before the corresponding increase in savings required to make that investment profitable. Specially, as a result of an increase in capital investment (i.e. a delay in the output produced by that capital) the previously expected flow of output is reduced. If that flow is not met by an increase in savings by consumers, then relative prices and the general price level will change and there is no guarantee that the savings required to make the original investment profitable will exist when that output is produced.
It should be clear then that not only is the stock of wealth subjective, but also the stock of capital – this means that there is no absolute measure of wealth, capital, savings, or investment. The main point to be taken from this is that economic fluctuations and changes in the price level are endongenous to a growing economy. Contrast this with a condition where the flow of pure and man-made resources is fixed at a constant level, any miscalculation by entrepreneurs will lead, as before, to a shift in relative prices and the price level, but eventually all fluctuations will die out as entrepreneurs will eventually match their schedule of output to the preferences of consumers. Thus through trial, error, and the information derived from changes in prices any complex economy will reach a stationary equilibrium, so long as the flow of wealth is constant (and assuming consumer preferences do not shift substantially between iterations).
However, if stationary equilibrium existed no one would spend much time on SI, so we need not concern ourselves with it. I only mention it here because is seems some investors assume implicitly that stationary conditions would exist except for government involvement (either through fiscal expenditure or monetary intervention).
Consider this post
Message 21547164
Free market interest rates and no creation of money in excess of savings ?
Sounds good to me. Your house would still sell for the same amount of money you paid for it in the 70's.
If we consider that output, in terms of quality, quantity, and type, are, in the long-run, increasing why would the price of long-lived consumption items such as housing remain the same? |
