Thanks this website
Thanks this website

Some time ago, I wrote a post in which I ranted about economies not being households (“ECONOMIES ARE NOT HOUSEHOLDS“). I have another questionable (and related) paradigm that I’d like to offer up for consideration.

Here is the typical narrative: “Government debt is like a mortgage bond – it all needs to be repaid!”

Here is why I’m starting to suspect that this is wrong (and bear with me, I am going somewhere with this, but it might take me a while):

The Goal Of A Well-Financed Life

My friends and I are in the honeymoon golden age of being adults. We’re just about done with being in our twenties, with all the dogsbody positions and the studying; and we’re not quite yet at the point of needing to fund private high-schooling and university costs for multiple children (thus far, the babies that have joined us are mostly cute toddlers who are just learning to walk/talk/use the potty).

I’m calling it the “honeymoon golden age” because there seems to be more disposable income to spend on fun holidays, and there is the occasional bonus which is nice. And all that adds up to: conversations about what to do with one’s savings.

I have these conversations quite often – mainly because of this blog. And I have a few things that I point out fairly frequently:

  1. Your financial advisor has strong incentives to push you into safer investments than you need – because this means that you’re not panicking about losing your money, and he’s getting fewer phone-calls during weeks like the one that we’re in.
  2. You are forgetting (and he is discounting) that by far your greatest asset is your earnings power – and it’s only beginning to be converted into other kinds of asset. If you really want to offset risk, you should be taking on more risk, not less.
  3. Stop worrying so much about the capital. If we’re having this conversation, then we are talking about money that you are never going to spend.

It’s that last one that I want to re-iterate.

What Are Savings?

To generalise broadly, savings mean different things to different classes of people:

  • The Poor – do not generally have savings. And if they do, it’s to cover big expenses like funerals, medical costs, etc.
  • The Middle Class – have some savings which go toward future non-essential expenses (like holidays and private-schooling for their children), and possibly some untouchable savings like a pension fund to cover a future retirement that will hopefully be comfortable.
  • The Rich though“live off the interest”.

And again, it’s that last one that I’d like to re-iterate. The wealthy…have passive income. They’ve reached a point where they have accumulated enough capital that the return on that capital:

  1. Pays for their lifestyle; and
  2. Adds to their already-accumulated capital.

And where does this capital end up in order to earn its returns? In government bonds. And equities. And other investments.

The point is, when people say things like “What happens when the government debt can’t be repaid?” – one appropriate response is “Who said anything about having it repaid?”

Once you’re above a certain income bracket: the money that you are saving today is not being saved so that you can spend it tomorrow. It is being saved so that, one day, you can live off the interest. And if that money gets repaid, you’ll need to find someplace else to put it so that you can continue earning the interest.

And given that much of the world’s wealth is owned by the wealthy, we’re talking about some fairly indefinite capital investments (in government debt, equity markets, property, etc).

Which is the reason why we can be less concerned about the “global debt explosion” that many of the alarmists like to throw out into the twitterverse. It’s almost certainly less worrying than it first appears.

PS: while I was doing some background googling around this, I found a Paul Krugman op-ed which might be worth a look: “Nobody Understands Debt

Happy Thursday.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at