Alice starts cutting back on meat to save shells for the future. This gives Bob a dilemma; he has less income so he can either:
Continue spending, drawing down on his shells; or
Spend less (for simplicity, on fish).
In the first case Alice’s savings are equal to Bob’s “borrowing”, and net saving is zero. In the second case, Alice can’t get the extra shells to save, because Bob is not buying her fish. Net savings are also zero.
This is cash saving. In the real world total savings can be above zero because of stockpiling and investment.
Let’s consider what happens if Alice tries to save money by producing more fish. If she uses the additional shells from this to buy more goods, she hasn’t saved. If she doesn’t sell them she hasn’t acquired any additional shells.
While building up stockpiles isn’t giving Alice more money now, the economy is producing more that it is consuming, and so this is an investment in the future.
Alice wants to build a new fishing rod to catch more fish, but doing so will require a lot of resources from others. She has to persuade others to lend her shells, and in return she promises to pay back more shells in future with all extra shells she’ll get from selling more fish.
The other villagers are now saving. They are consuming less, and this surplus is being used by Alice. Note that the villagers are not necessarily holding a different amount of shells as a result of this activity. The value, in shells, of this investment is equal to the value of savings.
Annual returns/yield/interest rates
Bonds and coupons
Internal rate of return
Discounted cash flow
debt structuring, refinancing after rates change, terms balanaced over time v focused on one period?