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Consumption = resources consumed today.  
Investment = resources not consumed today in order to provide more resources tomorrow.

Money | resources. In a functioning monetary economy, money can command resources.

But simply increasing the prices of - say - houses does not (ignoring for the moment any distorted incentives towards new construction) consume any real resources.

So I think you need another term here:

Consumption: Resources consumed today.
Investment: Resources used in ways that increase usable resources at a later date.
Speculation: Making promises about the allocation of resources that are presumed to be available at a later date.

Speculation does no harm (except inasmuch as it can fuel a consumption binge) until it has to be unwound.

This is not simple nitpicking. There is an important difference between consuming resources that you thought you were investing and oversubscribing future resources. While both result in a shortage of resources at some future date, the former wastes resources and sets unrealistic expectations, while the latter only sets unrealistic expectations.

Malinvestment, in other words, causes real damage to the real economy before the problem becomes apparent - while speculative bubbles cause real damage to the real economy mainly or only during the process of bursting the bubble.

This in turn has important policy implications, in that the damage done by a bubble can still be averted (almost) entirely by the time the bubble is discovered, whereas the damage done by real malinvestment is at least partly a done deal by the time you realise that the jig is up.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Apr 17th, 2010 at 09:23:17 AM EST
[ Parent ]
I think you're right, but there's two other concepts at play here too: risk and credibility.  Risk is the chance of failure, and trying to account for risk is a way of distinguishing between reasonable levels levels of speculation and unreasonable, or unsustainable, levels.  Credibility is the ability of an agent to be trusted by counter-parties, and is, like cash money, used to command resources. Greater credibility provides one with greater power to command resources. The problem is that one can't know with certainty, within a given system, the true credibility of an agent or the true risk of a venture.  This means it's really hard to tell until after the fact whether a bad investment really is bad, or whether a speculative bubble really is a bubble and not just an indication that some resources, such as fossil fuels or habitable space, are getting really scarce during conditions of global economic growth. Hence the old joke about economists correctly predicting 9 of the last five recessions and the tendency to think that naysayers are crying wolf whenever some start to raise alarms about such things.
by santiago on Mon Apr 19th, 2010 at 07:09:58 PM EST
[ Parent ]
That's true to an extent. However it is, at least in principle, possible to compute how much prices would have to drop in order to trigger a systemic margin call. Such computations can be compared with historical safety margins, historical price levels and historical intelligence on the increase in volatility as slack decreases.

Such calculations do not and cannot obviate the need to make political decisions about risk. Risk assessment, like discount rates, is inherently a partly political decision - and that's doubly true for systemic risk. But hopefully such calculations can make those political decisions more informed. And certainly, they can remove the plausible deniability of "nobody could have predicted."

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Apr 19th, 2010 at 07:23:18 PM EST
[ Parent ]


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