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Source link: http://archive.mises.org/16472/the-fed-obliterates-the-savings-ethic/

The Fed Obliterates the Savings Ethic

April 13, 2011 by

Lord Keynes was constantly worried that people were saving too much and consuming too little — thus the need for more and cheaper money to stimulate the economy. Mr. Bernanke is nothing if not a good Keynesian, and his low rates make even the savviest question whether to forgo consumption.

FULL ARTICLE by Doug French

{ 48 comments }

Steve R. April 13, 2011 at 8:20 am

Your not kidding! We have always made it a point to save before buying. Now,cash that is sitting in the bank is losing value due to low interest rates and inflation.

Besides the obvious observation above, there is a subtler one. People can only consume so much. True, we could buy many many many Big Macs, but even then – if we want to stay trim – we have to control our consumption. And based on my informal observations, our economic recession has dragged on due to lack of consumption demand. (We overproduced houses, the housing market collapsed, but recovery won’t occur till the oversupply is consumed).

Dumping money to stimulate consumption when there is apparently little demand for increased consumption is futile and destroys the savings ethic.

sth_txs April 13, 2011 at 8:39 am

I have no problem with the idea of several months living expenses, but how practical is that for the majority of Americans? Between taxes and inflation, most are falling behind. When I had my first job years ago, I figured I was better off paying my school loan and car loan (for a used car) than even trying to save for six months.

Rates are so pathetic now you are better off buying canned or frozen food and consuming that later. You always have to eat.

Donald Rowe April 13, 2011 at 9:09 am

Mr. French is not trying to give investment advice, but rather explain that the untenable situation that now exists is due to the complete misunderstanding of economics by the people who control the money.

It is charitable of him to make the assumption that they are operating in ignorance rather than diabolically, which may actually be the case.

In either case, those who hold the responsible positions know they will not be held to account, so they may act however irresponsibly they choose.

A case could be made that the economy would be no worse if it operated totally without control. At least then we could be sure that it was not being intentionally destroyed.

Daniel Kuehn April 13, 2011 at 9:14 am

Keynes was worried about too little investment, not too little consumption. He took consumption to be essentially a psychological law, and to the extent that reduced consumption posed a problem it was an effect of reduced investment. If all saving was matched by investment, Keynes and Keynesians could care less about the split between savings and consumption.

Beefcake the Mighty April 13, 2011 at 9:36 am

I actually thought the concern was not whether savings matches investment, but whether, given the clearing levels of supply and demand for money (in terms of interest rate and output), they match at a level that may represent less than full employment. Am I mistaken?

Daniel Kuehn April 13, 2011 at 9:54 am

Yes, I’d agree at least. But since an slack investment demand was what is identified as the major obstacle to full employment (both as a demand reduction in its own right and through its impact on consumption via the multiplier) I think practically speaking they end up being much the same problem.

One thing Keynes certainly did not propose was that the problem originated in a propensity to consume that was too low.

Beefcake the Mighty April 13, 2011 at 11:43 am

To claim this practical equivalence I assume you take savings to mean simply non-spending?

Matthew Swaringen April 13, 2011 at 2:04 pm

This doesn’t make a lot of sense given some of the theoretical “crazy” ideas used for boosting aggregate demand (even though always mentioned as less than ideal, I’ve never seen those such as Krugman or Stiglitz disagree that these are worse than doing nothing).

I recall hearing the question posed if digging ditches and filling them up again would do the job for example. I also recall Keynes suggestion that you pay people to go dig up money buried in the ground.

I don’t see how that can be reasonably called investment.

Then there is the whole theory that WWII pulled us out of the Great Depression (supported by most Keynesians I’ve seen write on the issue), when the huge boost in G in the GDP figure was on war machines and bombs and salaries sending people to go fight wars that didn’t produce a great deal that was useful to us after the war.

P.M.Lawrence April 14, 2011 at 4:48 am

In further support of that, consider this:-

Lord Keynes was constantly worried that people were saving too much and consuming too little…

Maybe by the time he was Lord Keynes, he was, but when he wrote “The Economic Consequences of the Peace” he provided it with some introductory historical background in which he commented very favourably on the effects of saving, at any rate the way it worked out in an earlier period.

Freedom Fighter April 13, 2011 at 9:15 am

I’m going to save non-perishable food, water and metals.
And I will launch my business sooner than I wanted.

Inflation makes me decide to start my business and invest in my products sooner than I wanted.
I wanted more money before I do it but since it’s not worth saving, I will just go with the flow and hope for the best.

Mr Whipple April 14, 2011 at 7:59 am

The first rule of business is, “never use your own money”. Surely, that is a tongue-in-cheek statement, but it holds some truth in reality. Rothbard pointed out that the largest debtors of society are the wealthy, and the large corporations. They can “afford” to not use their own money.

victor April 13, 2011 at 9:16 am

Will many Austrian schoolers have to leave our Germany/Austria with a rise of Weimar antics followed by populist (?) authoritarianism in the U.S.? Stay tuned… have you passport and visas in Ag, Au, or Pt. and they won’t take Visa or AmEx when then system seizes up, and the authoritarians step in. Do you think this will only happen in a Rhodesian fall to Zimbabwe crisis? We know it is coming.

Beefcake the Mighty April 13, 2011 at 9:43 am

Congratulations on your pretty profound misunderstanding of the nature of tyranny in the US.

Freedom Fighter April 13, 2011 at 9:54 am

Victor,

When the system seizes up and the authoritarians kick in Ag, Au and Pt will be worth nothing.

Mrhuh April 13, 2011 at 12:59 pm

Actually, we should be thankful that Ron Paul is increasingly popular and is managing to educate people.

Robby April 13, 2011 at 9:43 am

My question is what to do with savings in the face of (growing?) inflation. Making up numbers here: If consumer prices (counting food and gas) rise at an annualized rate of 10%, and savings grows at a rate of 1%, what is the rational response to the system?

The Anti-Gnostic April 13, 2011 at 9:48 am

Precious metals, arable land, job skills geared towards a lower division of labor after the collapse happens. Oh, and marry into a large family and have kids.

Gil April 13, 2011 at 10:10 am

Don’t forget firearms.

Dave Albin April 13, 2011 at 10:31 am

We need food, land, and commodities – not green backs. I would convert as much of your spare green paper here…. That’s true, stay in good shape so you can work for a long time. Has anyone written about this – the Fed and easy money and Keynesian demand-driven economics are making us fat? Is that true?

Colin Phillips April 13, 2011 at 10:46 am

I am thinking something similiar. While the Keynesians are empirically wrong to push interest rates down and thereby create inflation, the fact of the matter is that they do it anyway. In your example, while the interest rate is artificially low, saving cash loses you around 9% purchasing power per year. The rational response seems to be to spend everything before your purchasing power is all but wiped out. This makes a lot of sense in the short term, it is exactly what the Keynesians want and it’s what they get. It’s not even intentional, in most cases, for the poor especially. Rising prices means you need to dip into savings to handle unavoidable expenses more often, so you’re less likely to be able to save.

As The Anti-Gnostic implied, the long-term rational response, given that the distorted interest rate will lead to a crash sooner or later, is to invest in things which will greatly increase in (relative) value after the crash. Even if they do lose 9% per year for ten years, but then gain back all that (relative) purchasing power later, it’s still worthwhile. Of course, this implies you’re able to withstand that loss while waiting for the crash. But if you’re not, you wouldn’t be saving anyway.

Patrick Barron April 13, 2011 at 10:58 am

Colin,
Mises explained the three phases of inflation. In the first phase people save as before, because they believe that prices will either stabilize or fall to previous levels. In the second phase people accelerate their spending, because they see that their money deteriorates over time. In the third phase people exchange their money for whatever they can–the flight to real value. This is the crack-up boom.

We are entering phase two and may be well along the path to phase three.

Joe April 13, 2011 at 1:08 pm

@Robby,
Short the Treasury Bill. Use the EFT: TBT. When the fed starts to raise interest rates the inverse relationship on bonds will kick in. Bond prices will go down and interest rates will climb.
If you don’t want to do that just buy hard assets. Buy a home. The price will be inflated.

Mr Whipple April 14, 2011 at 8:04 am

…what is the rational response to the system?

ETFs? Put your money in a BlackRock account.

[/sarcasm]

J. Murray April 13, 2011 at 9:49 am

My problem with the advice was the incorrect assumption that the Fed knows me best and what I need to do with my resources. Considering I’m not foolish enough to get myself into a situation where I’m handing over a free loan to the government (which is what a refund represents), I don’t have to worry about it much, but if I did, what I did with it would be dictated by my needs and wants at the very moment. Spend it, save it, make it into little airplanes and set them on fire, it’s none of the business of the Fed what I do with my money.

Tim Kern April 13, 2011 at 10:04 am

“The Fed’s interest-rate policy also leads people into taking more risk with their savings than they should. ‘That’s why most of us are in the stock market, because there’s no place else to go,’ says 70-year-old John Lehman, who would rather have his money in bank certificates of deposit but must resort to speculating.”

The rise of stock prices is pretty much a given. We’ve seen huge inflation but little CPI creep. That’s to be expected, if you follow the money: it goes from the Fed to over-wealthy, insulated elites, who already have plenty of Bentleys and toilet paper. They have no need or use for additional consumer goods or additional cash, so they stash it — where? — in the stock market. Since there are a couple extra trillion dollars recently available, chasing roughly the same number of shares, the prices of those shares are naturally bidden up. DUH!

Now, why is the (large-cap) stock market rise a “given?” With all that money chasing limited stock, companies, regardless their management, are “simply” too big to fail. A bid on, say, GM, GE, or AIG can’t possibly lose.

The middle class, is one still exists, is further locked out — both of the direct investments (since stocks are expensive and wages are flat) and traditional savings (since interest rates are also flat).

And taxes keep rising. I’m so happy that I’m not younger!

Patrick Barron April 13, 2011 at 11:02 am

Tim,
Don’t believe the CPI numbers. Just look at the prices of things you buy yourself. Prices ARE rising. Commodity prices have doubled. The stock market and farm land prices are nothing but bubbles, held up by zero interest rates. It is impossible for prices to remain low, given the massive increase in base money. It WILL find its way into all prices over time. What the Fed has done is nothing short of criminal; the sooner all of us understand this, the better.

Tim Kern April 13, 2011 at 11:51 am

Yes, Patrick, over time.
The advantages of inflating currency accrue first to those closest to the spigot. In this country (as in all centralized economies), that means the richest and most-connected benefit first.

They can use the new money to buy things (but they aready have things), or they can invest it, which is why they buy stocks, which is why stock prices have risen more-precipitously since TARP, Bailout II and QE2. Now, when more and more consumers get their hands on this cheaper money, you’ll see consumer prices rise. (This is easy to see, as money has been passed out to all sorts of needy people who may or may not work.)

First, the prices of things that wealthy folk want rise. Then, when they’ve gotten into position, the peasantry partakes… in the higher prices.

So, you’re right: prices will, must, have to — rise.

Now, answer me this: how are the big creditors, with their government connections, going to fare when they get paid back with all that cheap money? Don’t go thinking this (currency manipulation) is over, yet!

Patrick Barron April 13, 2011 at 12:18 pm

They’ll howl for more bailouts, of course. You are right. The rich and government contractors get the money first and invest it in stocks, land, and commodities. Then the welfare dependents get it. Then, maybe, the middle class gets a very small piece. And the retired folks get nothing…except poverty in their golden years. Fiat money is an evil system.

Mr Whipple April 14, 2011 at 8:11 am

Monetary inflation —> price inflation —-> wage inflation. Each lags the previous. The “first owners” of the new money get all the benefits, while the people down the line get stuck with all of the price inflation and devalued dollars. I believe it was Palyi that showed that real wages never keep pace with real inflation, and that perpetual creeping monetary inflation is a “redistribution of wealth” from the lower and middle classes to the wealthy.

Of course, the government can always tax away all of those benefits. That always works. ;)

Freedom Fighter April 14, 2011 at 7:40 pm

The stock market will crash to epic lows. You can bet the Dow Jones will reach 4,500 in a couple of years.

What will increase in value through the stratosphere is commodities. Food, raw metals, petroleum, natural gas, energy, electricity etc.

Wars and social unrest will severely disrupt production. Even the wealthy will sell their stocks to hoard as many commodities as they can.

Silver and gold will fly through the roof. So will copper, lead, aluminum. Famine, food and energy shortages, base metal shortages.

Invest in commodities.

Coffee, cigarettes, tobacco will also fly beyond the sky.

China will buy as many energy and mining companies as it can on the cheap and to do that, it will finally sell it’s US treasuries and let it’s currency appreciate. China is going to be the great winner of this downfall.

The Chinese bubble is just beginning and it will last a decade and a half.

Barry Loberfeld April 13, 2011 at 10:21 am

“Hating Keynes” — This was on CounterPunch Monday.

Daniel April 13, 2011 at 12:56 pm

Keynes remedies will work if the right polices are implemented. Unfortunately, today’s politics don’t support the policies. So, when the Fed’s bond buying program ends, economic contraction will likely resume and the country will face the prospect of another excruciating slump.

Still more statist garbage from the left :/

J. Murray April 13, 2011 at 4:46 pm

Pretty awful. Even if we take this post at face value, it still doesn’t change the simple fact that nothing can be spent by a government without first being taken away from others. Doing so only promotes an even more severe curtailing of economic activity, which is exactly the wrong thing to do when a system is attempting to recover from a government caused failure.

Keynes is a crank whether you understand his real philosophy in depth or the misrepresented popular view. Neither Keynes is good for anyone.

El Tonno April 13, 2011 at 5:26 pm

Ho ho ho!!

http://www.alternet.org/teaparty/149550/what%27s_behind_the_right_wing%27s_bizarre_obsession_with_the_gold_standard

“But why would conservatives fear the judicious use of inflation? I suspect that their real concern is Keynesian economics. Inflation pegged to increases in worker productivity is the reason why a couple that bought a house in 1960 saw their fixed mortgage become more manageable with each passing year. Moderate increases in wage inflation make debt more manageable for the employed. It also reduces the reliance upon tenuous credit. In other words, a judicious amount of annual inflation is a vital component of wealth creation and thus, economic liberty for the many, not just the few. … As wages go down, workers rely more and more on credit instead of their own earnings to obtain property and services. In short, the American economy goes from being one made up of upwardly mobile individuals to larger numbers of debtors living in one huge company town. This is not exactly the concept of individual liberty envisioned by Adam Smith in 1776, but instead, dependence. There is no better example of the way the right is campaigning against the controlled use of inflation than recent comments by Sarah Palin. Palin, echoing Glenn Beck, attempted to take on the Wall Street Journal over the rising costs of groceries, erroneously implying that food prices are a reliable indicator of overall inflation. The problem with her analysis is that food and fuel costs are so volatile that they are not counted as a core indicator of inflation. Paul Krugman pointed out, for example, that over the past decade, food prices have not been that far afield of the general rate of inflation, which in and of itself is practically non-existent. If anything, there is a much greater risk of overall deflation.”

J. Murray April 13, 2011 at 5:31 pm

Deflation, deflation. There will never be deflation without the destruction of money.

Gil April 14, 2011 at 6:19 am

indubitably!

andy April 15, 2011 at 2:40 am

Murray,

I have a question about deflation. I have read quite a bit about deflation being good because you can buy more with less, if you have a fixed currency and increasing production. I don’t understand why production would increase if saving is more profitable, as wages and prices decrease. Can you refer me to any reading material on the subject?

Patrick Barron April 13, 2011 at 11:06 am

Doug,
Excellent essay. I did not know this:

“Working Americans put less money into financial assets last year than at anytime on record — except 2009, when people pulled money out. And while the Department of Commerce says the personal savings rate has risen to 5.8 percent, Whitehouse explains, “That’s in large part because it counts reductions in personal debt, such as mortgages and credit-card balances, as savings.” But most debt reduction, Whitehouse writes, has been driven by defaults, rather than saving.”

We all know that politicians and government bureaucrats uses statistics to perpetuate the myth that their policies are working. The “savings rate” is just another bogus, manipulated government statistic. My advice is prepare yourself and your family for hard times…they are a’comin’

Simon Grey April 13, 2011 at 11:21 am

I should have clarified this on the original post, but my advice was geared towards saving currency. There is little point in setting aside a store of greenbacks during this time of inflation. I would even say that it is not very wise to purchase gold and silver, given the government’s historical animosity toward private ownership of these metals (cf. Roosevelt’s confiscation of gold, the recent prosecution of NotHaus, etc.) Instead, my advice would be to purchase long-term assets or emergency stores, and let this be your “savings.” Trying to save money appears to be an exercise in futility, at least i this day and age.

Tony Fernandez April 13, 2011 at 11:26 am

Remember, the point of the economy is to increase standard of living. According to Keynes, the point of a purchase is not to make both parties better off, but to make only the producers better off. The consumer is forgotten in this short-sighted analysis.

A. Viirlaid April 13, 2011 at 11:43 am

As Mann described so long ago, the world of inflation is the illusion of wealth, created by the government’s printing press, distorting everything we see and perverting our judgment. Meanwhile the cry for stimulus continues, while our culture and values are buried under a pile of paper.

One must appreciate that for Austrians, The FED’s perverted focus on preventing Price Deflation at all costs is silly and harmful. While it is true that the “core” CPI may not be indicating meaningful Price Inflation when measured against the presumed base of Zero Price Inflation, it surely is indicating such Price Inflation against a base of say, 3 percent Price Deflation. And that is what is pertinent in our current economic environment.

A falling standard of living is virtually guaranteed by the Perverted Money Policy of The FED. As prices rise (and also are artificially kept from falling, as they would and should, if the economy were simply left to adjust to its own natural level of stasis) and as people lose jobs and see their incomes shrink in real terms, The People simply cannot buy the standard of living they used to be able to afford.

I fully agree with Doug French’s assessment of The FED as a bunch of Money-Printing Perverts.

They are indeed perverting social justice and creating social disorder.

Whether Keynes deserves any blame for this is not so immediately pertinent.

That The FED is doing this is pertinent, whether Keynes is used as justification or not for such a misguided policy.

Furthermore, as the article at the link reference from Barry Loberfeld to “Hating Keynes” makes clear, Keynes was in favor of the Government’s stepping in as a last resort to increase so-called Aggregate Demand when private consumers “refused” to step up to the spending plate and do their “civic duty” to spend. What nonsense.

Keynes fails because he never identifies what causes booms and busts —— and this is done satisfactorily and logically only by The School of Austrian Economics. Blaming a lack or a surplus of Animal Spirits is medieval witchcraft —— no I’ll take that back, people in Medieval Times and witches in all times were never that stupid. Keynes was.

The FED is harming all savers. This alone makes them deserving of our opprobrium and our odium.

But The FED is also destroying The Economy with its well-intentioned but misguided effort to ‘save’ the economy.

You cannot create real investment and real growth and real jobs when you have no saving or when you have negative real saving.

The fact that the Chicago FED’s Charles Evans stupidly actually wants to get rid of so-called “excess savings” so as to “stimulate the economy” tells us all we need to know about the Monetary Philosophy of The FED and how they run our current Broken Money System.

While bad, it is not even the worst thing that people have to play games to avoid losing the purchasing power of their own greenbacks. The worst thing is that The FED is so distorting the Real Economy that there is less and less hope of Real Recovery.

If one were to follow Keynesian philosophy, then the ultimate solution is for all of us to work for the Government and simply abolish the Private Sector.

That is the ultimate folly of Keynes.

The ultimate folly of Bernanke is that we can ‘stimulate’ with net-new printed money.

For the Keynesian approach you can go to the link provided by Barry Loberfeld to the “Hating Keynes” article.

For the Bernankian approach you can go to the Master’s own words at the link to the Federal Reserve below —— read Ben’s November 21, 2002 speech on “Deflation: Making Sure “It” Doesn’t Happen Here”.

http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm

Rick April 13, 2011 at 11:49 am

I saw a portion of an interview Charlie Rose did last night with Jim O’Neill, Chairman of Goldman Sachs Asset Management. He was talking about how the U.S. is saving too much and needs to consume more. He also mentioned China and how consumption was being encouraged. Apparently, another Keynesian in respect to economics.

He did have some other interesting things to say about the BRIC countries and other emerging economies, and labor.

The Anti-Gnostic April 13, 2011 at 2:05 pm

Jim O’Neill needs to be in disgraced exile (I’m being charitable here) rather than on TV getting a tongue bath from Charlie Rose.

Keynesians are intellectually dishonest. They know darn well that no individual or business could survive by debt-based consumption, so they contrive these macro explanations to justify what everybody knows makes no sense.

Mr Whipple April 14, 2011 at 8:40 am

They know darn well that no individual or business could survive by debt-based consumption

Right. Only the government can do that. Except maybe a large REIT, like Taubman. I’ve been following a story in Atlantic City regarding the Pier One Shops at Caesars. They redid the old Pier One Mall into very high-end retail stores, like Gucci and Louis Vuitton. The loan on the property, to Taubman, was $135 million by BoA (interest only, of course). The property was appraised at about $50 million. Taubman didn’t like the LTV, so they just walked away, turned it over to BoA, and then paid out dividends a few months later.

http://www.pressofatlanticcity.com/communities/atlantic-city_pleasantville_brigantine/article_095a8064-badf-11df-afca-001cc4c002e0.html

Then, there’s the unfinished and broke Revel Casino……

Cheap, easy money, chasing “pie-in-the-sky” risky investments.

The Anti-Gnostic April 14, 2011 at 9:54 am

“I’ve been following a story in Atlantic City regarding the Pier One Shops at Caesars. They redid the old Pier One Mall into very high-end retail stores, like Gucci and Louis Vuitton. The loan on the property, to Taubman, was $135 million by BoA (interest only, of course). The property was appraised at about $50 million. Taubman didn’t like the LTV, so they just walked away, turned it over to BoA, and then paid out dividends a few months later.”
_______________________________

Never understood why this is allowed to happen. If you and I were to try that, we’d be under serious threat of indictment.

In 2005 as I recall, GM was paying dividends of $1.25/sh with 300 BILLION DOLLARS in bonds outstanding. In any rational business environment, the creditors line up law firms ten deep and sue for receivership. The D&O insurer yanks the coverage. The directors resign and start speed-dialing their own lawyers. Top executives stuff their suitcases, gather up their trophy wives, and buy one-way tickets to Florida, or the Bahamas.

And now it’s just business as usual. Effing insanity.

A. Viirlaid April 15, 2011 at 5:39 pm

Keynesians are intellectually dishonest.

How sad, how true.

Similarly, The FED’s clowns will soon realize that their Playbook’s shenanigans cannot possibly LOWER the Unemployment Rate and bring more people into productive employment in the Private Sector — Government, using FED-printed money, can of course HIRE AS MANY AS IT WANTS — HECK, we could (and maybe should) ALL end up working for the Government, and be paid with FED-printed dollars. That would be Keynesian NIRVANA.

Once The FED realizes that it has FAILED, it will with its “intellectual dishonesty” announce, with a quite deep and serious and melancholy intonation that the Natural Rate of Unemployment has inexplicably RISEN, and that is WHY The FED (sadly) is now powerless to help America.

I will give it about 6 months before The FED makes that particular announcement.

It’s really great to be a neo-Keynesian economist because there are so many wacky explanations to draw on behind which one can hide one’s failures as a neo-Keynesian.

Oh, the Killer Bees were especially active that summer and that is why the crops could not be harvested, and that is why we had Food Price Inflation.

Or some explanations along similar lines.

Mr Whipple April 14, 2011 at 8:19 am

Don’t forget the elephant over there ————————> Treasury.

The US is dealing with a $14 trillion debt. Much of it is in short term Treasuries. People say we’re broke now. Imagine the annual deficit with a higher interest payment on the debt.

Julien Couvreur May 5, 2011 at 6:49 pm

That’s why we need Social Security to fund our retirements!

(Just kidding, of course.)

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