Let me make a serious confession: I’ve been guilty of hoarding cash and keeping my money on the sidelines. It started innocently enough. This company called Apple had released a new phone that everyone said was going to change the world. People lined up for days to get the new phone the moment it was released. The news media covered the launch breathlessly.
I didn’t even consider buying one. Sure, Jim Cramer’s nephew was telling everyone that it was a good way to impress girls. And I noticed that my friends at the Gowanus Yacht Club in Brooklyn were getting a even more of the fairer sex’s attention than usual when they brandished their iPhones. But I never seriously considered buying one.
Not buying an iPhone had more costs than just failing to seem like a cool early adopter. My old phone was rapidly deteriorating. It was more or less useless when it came to the web or email. I was adept at tapping out text messages with predictive texting on a standard phone keyboard. But my speed couldn’t match the speed of my friends using the iPhone’s full keyboard and even smarter predictive texting. Also, they could send text messages of lengths undreamed of by us old school cell phone users.
Why did I hold out? It wasn’t because I couldn’t afford the phone. I was keeping my money on the sidelines. I knew that there would be a second generation iPhone that would vastly outshine the first generation. My experience with iPods–and the pile of now embarassingly large early iPods on my desk–had taught me this much. I was saving my money for the planned future consumption of a new improved iPhone.
This turned out to have been a great idea. The 3G iPhone was indeed a huge improvement over the early iPhone. It also nicely illustrates the idea that savings is a form of delayed consumption, and hinges on the idea that there will be better days ahead for consumption. Even saving by putting money in a jar can be economically productive because it creates the possibility of future consumption that we expect will be more satisfying than present consumption.
I was reminded of this when my colleague Joe Weisenthal challenged Paul Krugman’s “Rusty Tractor” fable this morning, calling it a version of the broken window fallacy. The ‘broken window fallacy’ hinges on the idea that destruction is economically healthy because replacing something destroyed–a broken window–forces new money to enter into the economy. In the standard telling, this is a fallacy because the money spent on the window is money that is taken away from other spending. The window maker may make money but now the tailor loses exactly that much because the guy replacing the window can’t buy a new suit.
One standard reply is that the broken window fallacy doesn’t account for money hoarding. What if the guy with the broken window wasn’t going to spend his money at all? What if he was just keeping it in a safe beneath his bed? The problem with this view is that it forgets that money in a safe is money being saved for future consumption. Maybe the guy just wants to wait for the new iPhone. Smashing his window makes him spend his money now but it also means he can’t spend his money later. What’s more, it actually leaves him much poorer. Instead of having a window and an iPhone a year from now, he’ll just have the window he bought to replace the one we smashed.
Right now I’m hoarding money again. I believe there is a lot of money to be made in the financial sector. I’d love the chance to invest in a financial company that I believed would produce serious gains. But I won’t buy shares in any of the big banks right now because I believe that money would be better saved now for investment in new companies that will outperform losers like Citigroup and Bank of America.
Or, well, I wouldn’t buy shares in those companies. Unfortunately, the government has decided to override my decision by buying those preferred shares. This will mean that there is less capital available for future investments. It means that instead of being able to buy the equivalent of a 3G Bank, I’m being forced to buy the first generation iPhone bank. And so, of course, are you.
Maybe this will work out for the best. Maybe the geniuses in the Treasury Department and on Capitol Hill will find a way to hack the old banks and make them into 3G banks. But for some reason I’m pretty sure we’re going to regret we didn’t hold out for the next models.