Saving vs Investing and Job Creation

Everyone knows that saving your money instead of spending it right away is a good thing for your personal finances.  And everyone knows that investing is helpful for the economy at large, and can be for the investor if it goes well.  The folks in the saving and investing business have done their best to try to conflate these two things, and they indeed are related.  But they really aren't the same thing.

50 years ago, one type of bank, a Savings and Loan, took deposits from customers and gave them interest--usually about 5%.   They also made small loans, mostly home mortgages.  These also charged around 5% interest.    The interest rates didn't really need to balance out over the short term; what needed to balance were debits (demands from depositors, new loans, taxes, wages and so forth) and credits (mostly payments from borrowers).  If the interest the S&L was paying was much over the interest they were receiving for long, they'd probably have a shortfall.  But they can make the balance work by getting more deposits, and paying higher interest rates would help with that.  Bank inspectors would make sure the the accounting was all correct and that the bank kept a large enough reserve, as there is a huge temptation to fraudulently cut it too close to the edge, and a small, unexpected demand could trigger a bank run and the need for FDIC intervention.

Deposits with an S&L are investment of a sort, which has consequences on job creation.  Home loans promote construction, and all the folks involved get jobs: carpenters, painters, roofers, plumbers, electricians, insurers, appliance businesses, etc.  Sales of new homes do a lot of job creation.  Sales of used homes do less: there's little construction, although there probably are appliance people, painters, movers and others to be paid.  It also creates a downstream market for new homes.

Stocks and bonds are the same sort of thing: they promote the creation of new businesses (nominally, an Initial Public Offering).  But the subsequent market is handled differently.  New businesses are much riskier.  Individual "borrowers" are singled out and "depositors" select which ones they wish to invest in.  Return is a function of how well the business goes.  There are ways to pool these things, called "Mutual Funds".  Investing in the stock market is not really "saving", although a diversified portfolio over a long period amounts to the same thing.  There's also a similarity as far as jobs created:  IPOs create a lot of jobs, and commercial bonds often do too, but the day to day trading of these things creates no jobs, except for the brokers.  The main job creation from day to day trading is that it's a downstream market for the IPOs.

When choosing where to put your savings, it's important to recognize the difference between investing in job creation, and simply pushing money around.  Unless you're actually buying initial offerings of stocks or bonds, you're doing the latter.