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Saving is good, not bad, for American economy

February 1, 2009 – 4:55 pm by John

I was pretty angered by this Associated Press article, Americans save just when economy needs their money, by Martin Crutsinger. The very reason that Western economies, especially the U.S.’s, have experienced bubbles that have burst and left many people with dying businesses, foreclosed homes, no jobs, and insufficient savings is because they saved at a pathetically low rate. I’ve heard from multiple sources that 70% of the United States’ GDP each year is consumption. I don’t know if it’s anyone’s position to say what percentage it “should” be, but the facts of the real world have shown us that 70% is way too high for the economy to sustain.

I think the Austrian explanation of this recession is the one that’s most correct, if not completely correct, and that is that interest rates have been too low, Americans have saved too little, the Imperial Federal Government has funded its bloated budget with too much deficit spending by borrowing money from China, Japan, Saudi Arabia, and other countries. Their explanation of the housing boom and bust is regarded by most free-marketeers as mostly correct, I gather, and that explains a large part of our economic downturn in addition to those principles being equally applicable to every other industry and every economy with a centrally controlled money supply.

The Savior of America and the Republocrat Congress make consumer spending a priority, and MSM dolts like Statist of the Year Prize winner Paul Krugman say the government should take money from people who earned it and who want to save it and give it to people to dig ditches and fill them back up. They want to coax Americans into spending more and saving less because “the economy needs their money,” and to the extent that consumers can’t or won’t spend enough, they will just have the government loot and print as much as necessary to raise this consumption level up to some suitable level. They literally do not care what particular “consumption goods” the government spends taxpayers’ money on. They literally think that any spending of any kind, just to get money flowing to businesses, is what the economy needs to start improving. I’m not exaggerating or using any fancy, especially derogatory, Statist-hating terminology. Just take money from people, print the rest that you need, and throw it at anything to get money and credit into businesses. This is completely wrong and has been forever.

I know that the entire purpose of all economic activity is ultimately the consumption of goods by individual people, so it is easy to make the fallacious leap of logic that increasing consumption spending, even if artificially, promotes a healthier economy. But spending without saving, in other words credit without production to back it up, is unsustainable in the long run, is only possible with fractional-reserve banking and inflation, and leads to malinvestments by individuals and businesses who expect the spending to go on indefinitely (or who, at least, can’t predict when and where it will stop). Frank Shostak has written a couple of very elementary essays that explain how our banking–State economy promotes over-lending and over-spending (1, 2).

That Associated Press article was actually kind of amusing:

On Friday, the government reported Americans’ savings rate, rose to 2.9 percent in the last three months of 2008. That’s up sharply from 1.2 percent in the third quarter and less than 1 percent a year ago.

Good. 1.2 percent is pathetic. I bet most people would benefit from even more than 2.9 percent savings. The fact that 1% is not sustainable and contributed to this recession doesn’t change the fact that the recession is really a correction that will redirect capital from unprofitable and unwise ventures into profitable, sustainable ones.

I wonder if some people ask, What is our economy going to be if people don’t want to spend their money? What are we supposed to produce if not, ultimately, goods that satisfy human needs and wants? What are we supposed to save and produce if it isn’t going to be goods to meet our unending human needs and wants?

Good question. Human desires are unbounded and always will be, and there is never enough of anything to satisfy all those who want it. I don’t know what industries and businesses our newfound savings should be redirected to. But there are always unmet needs and desires for every living person, so the free market will discover where the profit is. People would figure out what to do without over-paying for cars, homes, televisions, and restaurants, if the government would get out of their way and stop inflating the money supply, lowering interest rates, and wasting trillions of their dollars every year. They could start by only paying for things they can afford, for one. (Not buying too-expensive houses and not living off of our credit cards, for example.) Peter Schiff says our manufacturing plants should stop producing goods for Americans to consume and start producing consumption and capital goods to export to foreigners. Foreigners who actually save their money and who don’t have such a ridiculously manipulated money supply that their savings are eroded by inflation.

Another hilarious excerpt (I think the interviewee was trying to be a little funny, a little self-deprecating):

They [Grace Case’s family] take “staycations,” grow their own vegetables, buy only used cars and pre-pay cell phones. Case hasn’t used a credit card in two years. And she’s saving more.

“It’s really a liberating feeling,” she said. “If you want something, you have to have the money for it.”

We’ve all seen real life imitate the Onion (and seen the Onion speak the truth more than MSM zombies tend to), but this is a case of real life imitating Saturday Night Live.

Many economists think the savings rate will keep rising, perhaps as high as 6 percent or more.

So where’s the money going? To savings accounts? To debt reduction?

No one knows for sure. But Robert Frank, Cornell University economist, says it doesn’t much matter.

“For economic purposes, paying off debt and saving are the same,” he said. “Incurring debt is negative savings; paying down debt is savings.”

He sees a long-term behavioral shift. He calls the spending of the past decade or more unsustainable.

“The only way people were able to (spend heavily) was by harvesting cash out of their home equity, which was just an illusion,” Frank said.

The ripple effect has been brutal. The economy shrank at a 3.8 percent annual rate in the final three months of 2008, the worst showing in 26 years. The biggest reason was that consumer spending fell for a second straight quarter, something that hasn’t happened since the 1990-91 recession.

Analysts believe the hard times will persist in 2009 as consumers, squeezed by layoffs and tighter credit, delay purchases of cars and other big-ticket items.

Some experts say consumers have been so shaken by how fast their wealth has shrunk, so burned by credit card debt, that they might not resume their robust spending for years, if ever.

Robert Frank sounds like a smart guy. And the only reason the economy is shrinking so much is because it shouldn’t have been so tilted towards consumption goods to begin with. That’s why free-marketeers call it a correction. I hope Americans continue increasing their saving until it reaches 6 percent per year or higher.

I fear what Obama’s Keynesian pump-priming stimulus plan will do to the economy. It is already weak and there has already been so much waste, so much inflation, and so much over-spending, that even more of the same problems will turn this recession into a drawn-out depression. That’s what all the libertarians and some people who claim to be conservatives say. Things will probably be looking up for the U.S.’s economy for a year or two after the stimulus, but it will be all downhill, faster than before after that.

Posted in Economics, Obama predictions, Stupid