In a determinate world, there are lots of things that people can do. There are thus many things to invest in. You get a high investment rate. In an indeterminate world, the investment rate is much lower. It’s not clear where people should put their money, so they don’t invest. We have a very low rate of investment in U.S. Corporations are the main places where investment happens. But instead of investing, companies today are generating huge cash flows—about $1 trillion annually at this point. They are hoarding cash because they have no idea what else to do with it. Almost by definition, you wouldn’t have free cash flows if you knew where or how to invest. The consumer side isn’t all that different. People have no idea. So we end up with a low investment rate, low savings rate, and take an optimistic view of a fundamentally indeterminate future.
The pessimistic quadrants are always kind of stable. This is especially true of the indeterminate pessimistic quadrant; if you think that things are going to pot and you believe you can’t control them, they probably will. You’ll be stuck going nowhere for a long time. Under determinate pessimism, you’ll be like China—stuck methodically copying things without any hope for a radically better future.
The big question is whether indeterminate optimism—which characterized the U.S. from 1982 to at least 2007—is or can be a stable quadrant at all. That the U.S. has a low savings rate and low investment rate is very odd indeed. If you have both low investment and low savings, one must wonder how the future is supposed to happen at all. That no one is thinking about the future is evinced by the low investment rate. So how can people be so optimistic (not saving any money) about a future that no one is working toward?
- Read the whole thing here, its brilliant.