Sunday, July 26, 2009

The Quant Recalls How She Learned To Save

I did a series of posts a while back (at WhirledView) styling myself as “the quant.” Like many of the Wall Street quants, I am a physical scientist turning my talents to economics. Unlike them, I do not have the power to destroy enormous amounts of wealth.

We need to save more. We have a burgeoning national debt that may not be a good thing in the hands of foreigners. It is likely to increase in the future. We also had a very large national debt as a result of fighting World War II.

I didn’t know about the national debt when I was in grade school. What I knew was that for some small sum (either a dime or a quarter), I could buy stamps to paste in a book. They were nice engraved government stamps, like the postage stamps I collected. When the book was full, I would get a $25 savings bond. The full book represented $18.75 in stamps, and it seemed like a really good thing to me that if I waited a few years, I would get $25 for that.

I didn’t know that the government was paying down all that money it had borrowed to fight World War II. The bonds were referred to as “war bonds,” but I didn’t fully realize the connection until fairly recently. It took most of my childhood for the country to pay down the excess war debt, so when my husband and I bought our first house and cashed in the bonds we had accumulated on our own or as birthday and Christmas presents from relatives, they must have represented some of the last of that excess debt, as you can see in the graph. The US budget has grown so much that the percent of GDP makes the graph more understandable than dollars or adjusted dollars would be.

So why not start similar campaigns for savings bonds now? I know, we’re all much more sophisticated, and probably kids today are too. But they still like stickers, and stickers with a monetary purpose might be appealing. It would remind all of us that it is our national debt, and that we might just do something about it; minimally buy some bonds, but also keep our elected representatives on their toes about dealing with the debt. And the kids would develop an intuitive or better understanding of compound interest and what saving can do for them.

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