America's savings crisis: A nation of children

Gary North - Wed 17 Mar, 2004

...America's savings crisis...Americans no longer save. They spend. You have read this over and over, but has the impact registered?...

Americans live in a fantasy world. This fantasy world is going to be destroyed by economic forces that are already well established.

Americans no longer save. They spend. You have read this over and over, but has the impact registered? Really?

Unfortunately, saving does not come naturally for most people; it must be learned. A young man doesn’t emotionally know that if he doesn’t save for his old age, he will be in dire straits. Children are not future-oriented. Present-orientation is one of the primary marks of a child. Children are also not independent; others make their decisions for them. That is the primary mark of a child.

Americans today are a nation of children. We can see this in their savings habits. We can also see it in their voting habits.

America's saving crisis: Recession

In recessions, the rate of thrift rises. People get scared. They worry about losing their jobs. They recognize that they are vulnerable. Like the overweight person who finds that his clothes are too tight and who thinks, "I must start dieting today," so is the spendthrift in a recession. He can no longer put off a savings program, he thinks. He must begin saving. So, he does.

But, like the overweight person who loses 20 pounds and whose clothes again fit, the saver is tempted to go off his budgetary diet. The money seems good. The job seems safe. He stops saving.

You can chart recession years by looking at the sharp increase in the national savings rate. You can also mark the period of the recovery. The savings rate drops.

In the most recent recession of 2001, the US savings rate never went over 4%. In previous recessions, it has gone over 8%. Today, it has fallen back into the 1% to 2% range. The recession has had no lasting effect on people’s willingness to sacrifice present enjoyment for the sake of future security and income.

From the point of view of the return on savings, I can hardly blame the American public. The Federal Reserve System pumped in so much money in 2001 that it drove the short-term interest rate from over 6% to about 1%.

Meanwhile, the rate of price increases was over 2%. After income taxes and the decline of purchasing power, a person with a passbook savings account or money market fund went in the hole. He had a negative return on his money. That means that his sacrifice of present enjoyment of spending the money left him poorer. Then why save?

America's saving crisis: Why save?

Here’s why. When someone loses the willingness to save, this affects his outlook regarding the future. He consciously decides that the payoff of self-denial today is a losing proposition. He concludes that the system is rigged against him in his capacity as a saver. He is correct: the system really is rigged in favour of the spender and the debtor.

When a recession hits, Keynesian policies of deficit financing are adopted by the Federal government. The central bank starts buying government debt with newly created fiat money. The government and the central bank adopt policies that are disastrous for individuals to adopt: reduced saving, more spending, more borrowing.

The public is so utterly ill informed today - as ill informed as Keynesian economists - that people mimic the state. They spend. They take on consumer debt. In the 2001 recession, they bought homes and new cars. This, we are assured by government economists, was a good thing. The consumer did not falter. The consumer spent himself into prosperity.

This is the essence of the Keynesian economic solution to recession: spend yourself (and the nation) into prosperity. Keynesians apply this principle to government spending because they believe that consumers are slackers when it comes to spending during a recession. There is insufficient demand. Demand - spending - is the key to recovery...not thrift (a negative), not reduced wage rates (a negative), but spending. So, the government must pick up the slack. It must also encourage the public to follow the leader.

This is a child’s universe. The child falls down and scrapes his knee. He runs to his mother to get her to make the pain go away. His mother will fix it! Two minutes before he fell down, he may have resented his dependence on his mother. He wanted to be a big boy. But when big boys fall down, they don’t run to their mothers...and so he finds he is not ready to be a big boy after all.

America's saving crisis: The state as mother

Americans - and indeed, Western consumers in general - have bought the Keynesian party line. They believe that self-discipline is not the way to success. They believe in the state as mother. So, we live under the watchful eye of the nanny state. That is what most people want. They vote for politicians who refuse to cut back on government spending. The state grows ever larger, and so do its promises.

In the US, we have again seen the rate of thrift fall to about 1%. We have seen the Federal government’s percentage of the economy rise to 25%. These phenomena are the result of the same mind-set. As surely as the determination to save is related to the determination to become independent economically, so is the determination to take on consumer debt to buy depreciating assets linked to the determination to find someone else to solve life’s economic problems. "Make it stop hurting!"

When the economy falls down and goes un-boom, the voters run to the government. "It hurts. Make it better." What snookums needs is a cotton swab drenched in alcohol. "This is going to hurt." Response: "No! Don’t!" The child wants the hurt to go away now. He doesn’t want what is necessary to solve his problem - his real problem. He doesn’t know anything about infection. He knows only that his knee hurts and he wants mommy to make it stop hurting.

In politics, however, mommy has to be re-elected at regular intervals. Mommy is not secure in her high office. So, she promises never to use that nasty old alcohol. She will kiss the wound and make it well. In doing so, she will increase the risk of infection.

Ever since John Maynard Keynes persuaded politicians that what they wanted to do - increase spending without raising taxes, and therefore increase the national deficit - is economically sound policy, the politicians have become incorrigible spendthrifts. They want to be re-elected, and a slack economy is their own scraped knee. So, they run to the central bank. "Kiss it and make the pain go away." The central bank obliges. It creates money. The supply of money goes up. This tends to lower the price of money - the interest rate - in the recession phase. The result: the destruction of a positive economic return for savers, after taxes and price inflation.

Keynes taught that what is rational for the individual during a recession - increased thrift - is bad for the economy as a whole. To cut expenses personally is self-defeating nationally, says the Keynesian, even if he calls himself a supply-side economist, a monetarist, or an Austrian economist. If his argument is that thrift and cost-cutting are good for the individual but bad for the economy, he is a Keynesian. He is denying the heart of free market economics, from Adam Smith to the present. He is saying that rational individual self-interest not only fails to coordinate the economy, it is bad for the economy.

America's saving crisis: The nanny state

This is the child’s universe. The West has become dependent on government to provide fiat money. If the world’s central banks were ever to stop creating money, the malinvestments which their low interest rate policies have created would be exposed by the capital markets as misused capital...and the capital markets would fall like a stone.

The West is now in its second childhood. It refuses to do what is necessary to grow up: reduce taxes, increase thrift, pay off the national debt, and stop creating new money. This can be done, but it won’t be done. To do it would hurt. "Make it stop hurting!"

Meanwhile, the nanny state continues to look for injuries to kiss. The voters need to tell the state exactly what it can kiss...but they never do.

This story is not going to end well for most people. I hope it ends well for you.


Regards,

Gary North
for The Daily Reckoning

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