Learn about Investment vs. Consumption I Video

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Learn about Investment vs. Consumption I

I've been wanting to make a video on a couple of terms that people have really turn around for a while now, and I think I really hits the core of some of the issues we’re dealing with now, with the credit tobacco but it’s a kind of a bit of at a deeper level. So the things I want to go over the ideas of savings, consumption, and investment. And you hear this a lot, everyone obviously says oh I've invested in the stock market or I have invested in a house. I really want to give you a framework for how I think about these ideas and frankly, I haven’t seen them depicted this way in any economics book although they kind of touch on this. But I think this is really how you should think about these things. So if you save money, you know when I think we all know that means that’s money that you didn’t spend. There’s couple of things that you can do with it. You can either consume your money, or you can invest your money. Let’s just think about a bunch of different situations and think about whether those things are consumption or investment. Let’s say I have, I don’t know let’s say it’s $100,000.00 that I'm dealing with. Let’s say I take that $100,000.00 and I build a factory. I build factory and I think that that factory is going to be able to produce I don’t know I'll make up some products. They’ll be produced cars, more efficiently and cheaper than any other car factory out there. Well I think this we’d all agree that this is an investment. And why is it an investment? Because I am taking this $100,000.00 and I'm putting it to some use that is creating hopefully more value than my original $100,000.00. In fact, I am expecting some type of a return on this investment and I've made a bunch of videos on what are the return on the investment is and you can usually quantify it. If I take $100,000.00 and I build this factory and this factory spits out $50,000.00 a year. It is probably creating at least $50,000.00 a year value assuming that nothing corrupt is happening in our system. In fact, it’s normally creating more than $50,000.00 a year of value. It’s maybe creating $100,000.00 a year of value. Fifty thousand of that maybe is going to the person whose doing the production and then the other half of the value is actually going to the consumer of whatever this factory is making and you have to think about it because if all of the value went to the person who produced the factory then there’s not a huge incentive for someone to use its products anymore. Anyway, that’s not the topic of this discussion whereas trying to get a mental framework on what consumption is versus investment. I think we all agree that if I were to build a factory that this is, let’s say I'll do everything in green as investment. So building a factory is an investment. Let’s say that I don’t know I'm homeless and I have this $100,000.00 and because I'm homeless, I don’t have a place to go and eat dinner and rest and relax and because I don’t have that, I can't get a job and I can't become a productive member of society. So maybe, I'm going to use this $100,000.00 to buy a simple house that meets all of my needs. So let’s say build a simple house and I’ll do that in a neutral color. Build a simple house so this is my other use of this $100,000.00. Instead of building a factory, I'm going to build a simple house and this house, it provides shelter for me and my family, it allows us that kind of security that now my kids can go to school and they can themselves become more productive citizens. I now have an address, I have a place to take a shower that allows me to go get a job and I ca now create value for society as a whole instead of being in the corner and begging for money from people. I would argue that this is also an investment. Why is it? Because I am taking this $100,000.00 that may be I have or someone gave to me. I'm taking this $100,000.00 as generating a return and what is that return? Well, if in a factory it’s maybe a little easier to quantify but at minimum it’s this work that I'm able to do because I now have a house. Because I have this security, I have the address, I have the shelter, I'm able to relax. It’s that security and it is also the return that probably my kids are going to be able to now contribute to society. Maybe if they grow up homeless, they would have never been able to contribute and now that they had a roof over their head and they are able to go to school etcetera, they are be able to give some economic value back to society. It’s hard to value. Maybe I didn’t have any job before, and now I have a job and I can contribute $30,000.00 a year to society. Maybe I am working at someone’s factory, maybe I am providing some other and maybe I am a farmer now and whatever. I am providing some source of value and maybe my kids if they never gone education, they would have been or maybe they could have made at a 10,000 of value per year to people and now they can add 20,000 of value. So that difference would also be some of the return on this investment, so I also consider this to be an investment. Now, my question to you is, let’s say that I already had a house. This is an investment. Let’s say I already had a house and my family is happy and we have everything we need; we have food on the table and my kids go to school and I may able to get a job and all of that exist. But let’s say I still have a $100,000.00 and I use that $100,000.00. Let’s say I used that $100,000.00 to put some Granit Countertops so that’s our money leftover. Let’s say I'm going to add a bathroom to my house. And I will I don’t know, I’ll put the latest hardwood floors just so that my family will be impressed with hardwood floors and you can imagine and maybe I add 2000 ft2. You know we can't get all that $100,000.00 but I think you’ll bare with me. So I am essentially doing some major home improvements so my question to you, is this an investment or is this consumption? Now, in our everyday world, the way with most people we deal with they will call this so I've invest it in my house and why are they saying that? Because they say by spending $100,000.00 in the house in this way that maybe enough you have watched the Holman garden channel. They are doing this all the time and then if you pour this $100,000.00 into your house that maybe the value of your house is going to increase by a $150,000.00. Or someone else all of a sudden is going to perceive the value of your house as being a 150 and they’ll say well, you got a $50,000.00 return on investment. I’d argue that bad is not investment that is speculation. You are essentially piling money into this stuff and I’ll do this in red. Consumption is in red so this s consumption. What’s happening here truly economically? When you add Granit or you add an extra bathroom or hardwood floors, this extra 2000 ft2. Is it making anyone who’s living in that house more productive, is it to making you harder working? Is it making you more likely to invent that cure for cancer or more likely to invent a way of getting cheap energy or produce more widgets? No! If anything providing more things for you to have to take care of that you’re not really focus much on your work or more energy is going to have to be expanded to maintain this type of place. I mean to heat and cool a 2000 ft2 house. So anything by actually pouring the $100,000.00 here, you are actually creating something that is going to suck more out of society. In fact, in no way is this going to contribute to the collective wealth of society. The last two examples I gave contribute to the collective wealth of society. Some of which you share and that is your return on investment but as a whole, this is an investment to society and it is going to make the pie bigger. This right here does not make the pie bigger. It might make you a little bit happier. It might make your ego feel a little bit better and let your pride grow in yourself righteousness grow and show other people that you’ve arrived. But it’s not going to increase the wealth of society. When you say that you’ve invested, you are really just saying I've speculated. What you are saying is by paying this $100,000.00; you are going to find essentially a greater fool out there, who you know before they could have done the same thing. They could have bought your house, spent a $100,000.00 and done this if this is what would have made them happy. But what you are saying is essentially that you are going to find somebody out there who is willing to pay a $150,000.00 extra dollars for something that should have only cost $100,000.00. And in fact, in anything, if you use this at all, the value of this is going to go down so you are just somehow assuming that and you are assuming that the Granit Countertops that you choose are going to be the taste that someone else would like, or that the hardwood floors are going to be the taste that someone else was like. I would actually argue that when you customize your hose in this way, you are creating a $100,000.00 of consumption to your taste and I'll be surprised if someone else truly is willing to pay more than $100,000.00 unless they are being in some way irrational or they can finance this because it’s part of the mortgage. Anyway, this is I think you know it is just a big picture. Investment adds value to society. Investment a simple house as value to society. Consumption is something where you people might call it an investment because it’s a kind of speculation. It might find some other guy who’s willing to emotionally pay more for something but it is not in anyway. It’s money that’s burned. It’s not creating more value for society. I'll continue this in the next video.

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I've been wanting to make a video on a couple of terms that people have really turn around for a while now, and I think I really hits the core of some of the issues we’re dealing with now, with the credit tobacco but it’s a kind of a bit of at a deeper level. So the things I want to go over the ideas of savings, consumption, and investment. And you hear this a lot, everyone obviously says oh I've invested in the stock market or I have invested in a house. I really want to give you a framework for how I think about these ideas and frankly, I haven’t seen them depicted this way in any economics book although they kind of touch on this. But I think this is really how you should think about these things. So if you save money, you know when I think we all know that means that’s money that you didn’t spend. There’s couple of things that you can do with it. You can either consume your money, or you can invest your money. Let’s just think about a bunch of different situations and think about whether those things are consumption or investment.

Let’s say I have, I don’t know let’s say it’s $100,000.00 that I'm dealing with. Let’s say I take that $100,000.00 and I build a factory. I build factory and I think that that factory is going to be able to produce I don’t know I'll make up some products. They’ll be produced cars, more efficiently and cheaper than any other car factory out there. Well I think this we’d all agree that this is an investment. And why is it an investment? Because I am taking this $100,000.00 and I'm putting it to some use that is creating hopefully more value than my original $100,000.00. In fact, I am expecting some type of a return on this investment and I've made a bunch of videos on what are the return on the investment is and you can usually quantify it.

If I take $100,000.00 and I build this factory and this factory spits out $50,000.00 a year. It is probably creating at least $50,000.00 a year value assuming that nothing corrupt is happening in our system. In fact, it’s normally creating more than $50,000.00 a year of value. It’s maybe creating $100,000.00 a year of value. Fifty thousand of that maybe is going to the person whose doing the production and then the other half of the value is actually going to the consumer of whatever this factory is making and you have to think about it because if all of the value went to the person who produced the factory then there’s not a huge incentive for someone to use its products anymore. Anyway, that’s not the topic of this discussion whereas trying to get a mental framework on what consumption is versus investment.

I think we all agree that if I were to build a factory that this is, let’s say I'll do everything in green as investment. So building a factory is an investment. Let’s say that I don’t know I'm homeless and I have this $100,000.00 and because I'm homeless, I don’t have a place to go and eat dinner and rest and relax and because I don’t have that, I can't get a job and I can't become a productive member of society. So maybe, I'm going to use this $100,000.00 to buy a simple house that meets all of my needs. So let’s say build a simple house and I’ll do that in a neutral color. Build a simple house so this is my other use of this $100,000.00. Instead of building a factory, I'm going to build a simple house and this house, it provides shelter for me and my family, it allows us that kind of security that now my kids can go to school and they can themselves become more productive citizens. I now have an address, I have a place to take a shower that allows me to go get a job and I ca now create value for society as a whole instead of being in the corner and begging for money from people.

I would argue that this is also an investment. Why is it? Because I am taking this $100,000.00 that may be I have or someone gave to me. I'm taking this $100,000.00 as generating a return and what is that return? Well, if in a factory it’s maybe a little easier to quantify but at minimum it’s this work that I'm able to do because I now have a house. Because I have this security, I have the address, I have the shelter, I'm able to relax. It’s that security and it is also the return that probably my kids are going to be able to now contribute to society.

Maybe if they grow up homeless, they would have never been able to contribute and now that they had a roof over their head and they are able to go to school etcetera, they are be able to give some economic value back to society. It’s hard to value. Maybe I didn’t have any job before, and now I have a job and I can contribute $30,000.00 a year to society. Maybe I am working at someone’s factory, maybe I am providing some other and maybe I am a farmer now and whatever. I am providing some source of value and maybe my kids if they never gone education, they would have been or maybe they could have made at a 10,000 of value per year to people and now they can add 20,000 of value. So that difference would also be some of the return on this investment, so I also consider this to be an investment.

Now, my question to you is, let’s say that I already had a house. This is an investment. Let’s say I already had a house and my family is happy and we have everything we need; we have food on the table and my kids go to school and I may able to get a job and all of that exist. But let’s say I still have a $100,000.00 and I use that $100,000.00. Let’s say I used that $100,000.00 to put some Granit Countertops so that’s our money leftover. Let’s say I'm going to add a bathroom to my house. And I will I don’t know, I’ll put the latest hardwood floors just so that my family will be impressed with hardwood floors and you can imagine and maybe I add 2000 ft2. You know we can't get all that $100,000.00 but I think you’ll bare with me.

So I am essentially doing some major home improvements so my question to you, is this an investment or is this consumption? Now, in our everyday world, the way with most people we deal with they will call this so I've invest it in my house and why are they saying that? Because they say by spending $100,000.00 in the house in this way that maybe enough you have watched the Holman garden channel. They are doing this all the time and then if you pour this $100,000.00 into your house that maybe the value of your house is going to increase by a $150,000.00. Or someone else all of a sudden is going to perceive the value of your house as being a 150 and they’ll say well, you got a $50,000.00 return on investment.

I’d argue that bad is not investment that is speculation. You are essentially piling money into this stuff and I’ll do this in red. Consumption is in red so this s consumption. What’s happening here truly economically? When you add Granit or you add an extra bathroom or hardwood floors, this extra 2000 ft2. Is it making anyone who’s living in that house more productive, is it to making you harder working? Is it making you more likely to invent that cure for cancer or more likely to invent a way of getting cheap energy or produce more widgets? No! If anything providing more things for you to have to take care of that you’re not really focus much on your work or more energy is going to have to be expanded to maintain this type of place. I mean to heat and cool a 2000 ft2 house. So anything by actually pouring the $100,000.00 here, you are actually creating something that is going to suck more out of society. In fact, in no way is this going to contribute to the collective wealth of society. The last two examples I gave contribute to the collective wealth of society. Some of which you share and that is your return on investment but as a whole, this is an investment to society and it is going to make the pie bigger.

This right here does not make the pie bigger. It might make you a little bit happier. It might make your ego feel a little bit better and let your pride grow in yourself righteousness grow and show other people that you’ve arrived. But it’s not going to increase the wealth of society. When you say that you’ve invested, you are really just saying I've speculated. What you are saying is by paying this $100,000.00; you are going to find essentially a greater fool out there, who you know before they could have done the same thing. They could have bought your house, spent a $100,000.00 and done this if this is what would have made them happy. But what you are saying is essentially that you are going to find somebody out there who is willing to pay a $150,000.00 extra dollars for something that should have only cost $100,000.00. And in fact, in anything, if you use this at all, the value of this is going to go down so you are just somehow assuming that and you are assuming that the Granit Countertops that you choose are going to be the taste that someone else would like, or that the hardwood floors are going to be the taste that someone else was like.

I would actually argue that when you customize your hose in this way, you are creating a $100,000.00 of consumption to your taste and I'll be surprised if someone else truly is willing to pay more than $100,000.00 unless they are being in some way irrational or they can finance this because it’s part of the mortgage.

Anyway, this is I think you know it is just a big picture. Investment adds value to society. Investment a simple house as value to society. Consumption is something where you people might call it an investment because it’s a kind of speculation. It might find some other guy who’s willing to emotionally pay more for something but it is not in anyway. It’s money that’s burned. It’s not creating more value for society.

I'll continue this in the next video.

Transcription by: Scribe4you Transcription Services