MSNBC tells the sad, sad story about how Americans are having to tighten their belts. For example, in one heart rendering story, a guy is told by a car dealer that he can’t buy a car unless he actually has some money! Can you imagine? What is this country coming to when you have to actually pay for stuff?
Source link: http://archive.mises.org/8773/oh-those-suffering-americans/
Oh those suffering Americans
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Your callous comment aside, try to understand that most Americans living now have grown up in a society of debt. A society that says you are a credit risk when you have never borrowed money or opened a credit line before. Where if you don’t buy a house, then you aren’t living up to the American Dream. And since our earning dollars haven’t kept pace with inflation, we are nickled and dimed beyond belief. We’re supposed to save…and with what? Not all of us eat out every night and buy the latest plasma TVs like they say in the media. We just make ends meet like the rest of the world. It’s a just a hard sad lesson about trusting our economics to the so-called pros and leaders…
Jeffrey_Tucker: LOL! Good stuff. Note the similarity to what we’ve been hearing about what an atrocity it is when banks have to pay 6% instead of 4% annualized on loans to each other, or how banks have to accept less than they deem mortgage securities to be worth in order to sell them.
Deb: Also a good point. No one seems to show a hint of concern for savers or how it’s been nearly impossible to beat inflation and taxes and come out ahead.
Reminds me of a cartoon I once saw.
A father scratching his head over a pile of bills on the kitchen table says..
“We will have to live within our means.”
His stunned wife, drops her coffee cup and says…
“My God! It’s come to that!”
Deb, you do make valid points of course, but at the same time too much of the population did spend money they did not have, and this is true in the UK as much as in the US. To leverage your house against your car against another loan and to pay a mortgage with a credit card can just not end well.
There is responsibility to be assumed all around.
Just a week ago I saw a commercial for one of those credit rating agencies that went something like this: 2 auto mechanics at work, one drives in with a nice, shiny new sports car. He was able to do this because his credit rating was good and thus he could afford the car because he got a “good rate”.
Nothing about the fact that he saved his money, or earned an income that would justify such a purchase. Apparently the difference between owning the car and driving a car that chicks would laugh at was his credit rating and his ability to get cheap financing.
Again, this was just a week ago.
Can we finally call it what it is? I know it’s not novel, but I’ll suggest, “The living-beyond-our-means bubble”. There’s nothing wrong with leverage, in fact, some economic models suggest that it’s requisite to long-term growth. Yet, we over-leveraged as a society.
Once I got past my initial “whaa” feeling about Deb’s post, I think her more subtle point is relevant.
With all the taxes, spending, welfare, and pending inflation, where is the incentive to save? Saving cash is a loosing solution. Investing in a volatile market rife with government intervention and coercion, and expecting even more on a scale unseen in the past, certainly doesn’t seem like the greatest idea. Commodities are always risky, and who knows when some politician might decide to comfiscate it. So you put your cash into things. Things you can use, or sell later, or hold on to. And you bet on yourself being able to keep earning income, because it’s the only thing you can depend on.
All of the incentives are to spend, no matter how wrong or destructive it is, and since it appears that the US is about to elect a government to make Marx proud, there’s no sign it’s going to change.
Keith, good point, if we hold gold the government may confiscate it like they did in 1933. I was considering holding money in foreign banks in the native currency, however there is no guarantee the government won’t confiscate foreign accounts as legislation has already been passed to set the stage. If I keep cash in a safe at home they’ll inflate it away. So I just keep scratching my head.
Keith — you nailed it. People act with purpose, and you listed many of the opportunity cost choices folks run through in deciding what to do with their money.
The beauty of a contraction is that it forces people to save and return to healthier fiscal habits. But now the real tyranny of government is exposed — it won’t allow the cycle to run through, and will risk further destruction of the average citizen’s wealth to keep the politically-connected afloat.
Deb’s statement tells much of what politicians have done for America.
Her statement “trusting our economics to the so-called pros and leaders” is indicative a lack of economic understanding on the part of the general public and the “pros and leaders”. It is indicative of a trust misplaced. Economics has no need to be trusted or mistrusted. Economic law is what it is. As Mises frequently indicated, it is the belief of politicians that the laws of economics can be ignored. However, economic law is stronger than political law. Until Deb and others learn placing trust in politicians is a misplaced trust the suffering must continue. When economic law is heeded, suffering will still exist, but it will be less. Unlike politicians, who promise what they cannot deliver, economics and the unhampered market will deliver all that can be reasonable expected. The masses must be learn more about economic law, a choice they might only make after they realize their trust in politicians has been misplaced.
Deb is more right than wrong.
Our own government lives beyond its means by choice and they never have any trouble getting money to do anything they want.
Twenty-somethings today were not alive when this country was still on anything resembling the gold standard. The only thing they know is fiat money and living on debt.
When the only tool you have is a hammer…
There is an excellent analogy in the science world for economics. It’s called Electronics. The difference between them is that in Electronics, the medium of exchange is signed negative (the electron) and the “holes” are signed positive.
Currency is Current or Amps and it’s value is realative to the velocity of money. Debt is a “hole” or positive charge. Savings is a negative charge. Mind you that the electronics signing is opposite the signing we would apply to our money, but it is only an arbitrary assignment in electronics.
When people live and produce commodities and services, they are generating current flow from the building up of real charge, electrons.
When the Fed “stimulates” the economy, they do it by creating more “holes” to be filled. This is like increasing the voltage by creating a larger hole for the electrons to fill. But the number of electrons available is unchanged. Real production, real service creates more electrons.
The problem for the consumer is that by having more holes to fill, means that there is less incentive to build up a charge of electrons, ie; Savings. The electrons that are available need to keep moving in order to keep the holes filled. The greater the voltage that the Fed creates, the less each electron is worth and the faster it has to move to keep up with the holes (Market Velocity).
Sound money, on the other hand, is not based on the creation of holes but on the building of real charge. With sound money, gold, silver, etc. there is a means and an incentive to build charge. When holes are created, there is ample electrons available to fill those holes.
I am amazed that Economists have failed to see electronics as a model for economics. The more I learn about economics the more I see the parallels between them. The big difference is that electronics has formulas and theories that work, everywhere, and can accurately predict and measure the forces and particles at work. Economics it seems has no viable theory or formulas of the same caliber, with the exception of Mises et al.
We cannot save because our money has to keep moving to be useful in the rarified atmosphere of Fed holes. And the only way to ground the system, to bring the voltage down, is to create more electrons, more real commodities and services, to fill the gaping void the Fed made.
In contrast, sound money would provide the means to build charge from what already was produced, instead of draining charge as soon as it is produced.
Runaway inflation occurs when the number of “holes” excedes the capacity of the curcuit to fill them. The curcuit is at maximum current and has no more electron production to meet the demand of the “holes”. More holes will not make the curcuit more powerfull, even though the formula for power is voltage times current, in actuality, this is only true if the number of electrons is equal to or greater than the number of holes.
A vacuum does not suck. It can only be filled by positive pressure. The same is true of Electron holes. They can only be filled by real electrons. Creating more “suck” doesn’t accomplish anything after a certain point.
The runaway situation is an attempt to “suck” more production out of the system by increasing the number of holes even further. But if you are already moving as many electrons as you can, the greater number of holes will not make more electrons!
So what happens? The holes remain UNFILLED. The demand placed on the circuit excedes the capacity of the curcuit and the steady increase in power tapers off. Turning the knob up to 11 will not make the stereo any louder than it already is!
When the Fed creates a hole, it’s like creating an atom without any electrons. Sound money systems create voltage by gathering electrons together.
Only the Sound Money system can maintain power over time. The hole creation system runs out of ability in the long term.
Deefburger-
That is the most elegant physical analogy for market forces I have encountered yet!
“A vacuum does not suck. It can only be filled by positive pressure. The same is true of Electron holes. They can only be filled by real electrons. Creating more “suck” doesn’t accomplish anything after a certain point.”
Would one of the webmasters of Mises please publish this as a separate thread, so we can get more discussion on this?
I think you should say that not currency, but “capital” = electrons. It is real value of goods and services, which the currency represents, not the paper dollars themselves, which keep the circuit flowing. You cannot create electrons out of nothing. But the Fed/govt can create currency out of nothing.
You can expand the analogy by adding entropy (govt inefficiency), enthalpy (interest), capacitors (savings banks?) and resistors (Wall Street?) to the circuit. All the resistors upstream (Wall Street, Banks, Paulson/Goldman Sachs) drain/divert the electrons pumped in until there is little left for us consumers at the downstream end! Interest ends up generating lots of heat (enthalpy) in the resistors, that drains electrons out of the flow, but does not do useful work for us at the downstream end.
From the seat of my pants, this seems like it could generate a useful model, but I would have to give it much more thought to figure out what the different elements are in the circuits.
Does the Fed pretend to be a capacitor, storing up charge to pump into the system as needed? It is not really, because it is not real savings/capital, not real electrons. Only real savings in real banks could act that way.
What becomes a transistor, that amplifies the current? Entrepreneurs and businesses that use the electrons to generate more electrons?
Please expand on this idea!
I don’t think it serves us any good to pretend Americans aren’t suffering.
We can take two approaches here. We can either pretend that America has a free market and is doing well, or we can acknowledge that the economy is in shambles precisely because we do not have a free market.
Since the first approach is dishonest, I prefer the second approach. As Ms. Deb says, many of us live fiscally conservatively, and still just barely get by. This is because the government is constantly stealing from us, through inflation (end the Fed), through taxation (end the IRS), and through regulation (end the regulatory state).
If we had a free market economy, it would be far easy for common people to get by.
Regards,
Alex Peak
Thank you Maturin!
I agree with you in that capitol=electrons. This is more consistent with the analogy.
I think that superposition theorem could be applied to examine individual components in a complex and largely unknown circuit. There are formulas for current, voltage, power and resistance that can be applied if the analogous components can be sorted out.
E=I*R is E lectromotive force (voltage) = I (Electron current in Amps) * R esitance in Ohms.
Power is P = E*I Power in watts = E * I
E/I = R E/R = I
We have to be careful with this analogy, in that there are components known and unknown that may or may not be directly analogous. Some components are active, some are passive, some are sub-circuits with characteristics similar but not identical to the larger curcuit.
Since nobody has attempted this before, applying Electonics Theory to Economics, Caution is advised!
In Superposition theorum, all components have a characteristic Voltage, Current, and Resistance that can be determined by replacing the complex circuit with another single component with a characteristic Voltage, Current and Resistence. This would be a very fruitful persuit if the proper analagies could be determined.
It might also be helpful to reverse the signing in the electronics so that in Electro-Economics the electron is positive and debt is negative. The formulas still work the same.
I’ve been thinking about this for a while and I would love to see more people pick this ball up and toss it around! Electronics is well within the ken of average people like us. There is no magical preisthood or academic hazing rituals that need to be done to understand it in it’s basic forms.
By this resoning, it is easy to see that just digging a deeper hole is not going to make a lake in the desert. If the only source of water is a fire hose already, then making the hole deeper is not going to get more water out of the hose. Water and plumbing systems use the same basic rules as electronics! Superposition is used to evaluate components in the design of a building’s plumbing system as well. Pressure, Current and Resistance use the same formulas. Why not Money?
Plenty of good points on this thread. The Fed has maintained inflation and low interest rates for pretty much all of its history, and thus discouraged real savings that could have been used for sustainable investment, instead of the risky bubbles they keep propagating. Why save when interest earned is so low? Why save when the value of the dollar keeps declining?
Nonetheless, it’s one thing to spend all of your money and not save, and it’s another thing to do as the government has done and borrow, borrow, and borrow ever more. Have we as a society merely gotten the government we deserve?
Maturin and Deefburger,
it is true that economics on the macro scale appears to have a great similarity to electronics and fluid flows, but there is a danger that is associated with this and all forms of economic modeling. The danger lies in the fact that the economy is comprised of “rational components.” These components are liable at any moment to change their characteristics and throw off the careful model that has been developed. This does not mean that the model is without merit and value. I feel that it is quite useful in a broad sense to help the layman understand aspects of the economy and how they fit together in a static equilibrium. As long as the user is aware of the limitations of the model and the pitfalls that can be encountered when one tries to examine elements that are not measurable or knowable, I think that it can be a helpful tool. When improperly applied, it is no better than the mathematical models of the positivists. Caution should guide the administration of these tools, coupled with a firm understanding of human action.
As I grew up, I was never taught about debt and when it was appropriate to use it. I was never taught about a checking account, a credit card, investments and even about cash reserves for emergencies. Consequently, I became like most Americans. I have learned the hard way and will teach my kids by example what to do and what not to do. We can’t get ourselves out of this mess quickly, but we absolutely must use it as a lesson and example for our kids.
I’m a little confused by the statements that it is impossible to save in the current environment.
It seems to me that saving can be done with any asset you like, be that in a commodity (gold, silver, real estate, etc), soft assets (stocks, options, etc), or a future claim on goods (currency).
If you don’t like the drawbacks of saving in currency (like government manipulation), then save in a different medium. They all have drawbacks and there is no medium that does not in reality. So asking for a medium with no drawbacks is the same as asking government to create something out of nothing.
For example, any hard asset is subject to losing value due to increases in technology. Doing more with less. So if less of the hard asset is required to do the same task, then the real value of that hard asset will go down.
Any soft asset, like grains, or foodstuffs, is subject to rot and/or increased storage costs.
And if we’re really saying that we don’t have enough left over to save, then I think we’re fooling ourselves about how many of our expenses are needs. The only things we absolutely need are food and water. (I’ll grant that some people have medical costs too, but that’s an exception, not the rule.) The ends shouldn’t meet during good times, they should overlap. That way in bad times, they can still meet or you can use some of the slack from the good times to make them meet.
It also bugs me that we feel sorry for someone that is learning something, like that you have to save if you want to consume. We don’t feel sorry for kids who learn that 2+2=4, so why feel sorry for this guy in the article who has now learned that he will need to save in the future. This is a great thing. Just like the kid, he can now be a contributing member of society and start producing value.
Stanley Pinchak,
Well said. I agree with you that the trouble with the model is the unknowns. However, just like in Physics, there is a limit to what the model can and cannot do.
Take Newtonian Physics for example. They are accurate until you get down to the scale of the atom, from there quantum mechanics is where it is at. Quantum Physics deals with the unknown as well, and is also where one must go in the study of electronics when the scale gets small and the details more important and more and more unknown.
I think Electro-economics would work for modeling the macro-scale economy and as a tool for understanding the larger system. But we would need to fall back on something like Quantum Mechanics to model the Micro-economy. Or mabey just a good dose of Objectivist Philosophy!
”
# Dividendium
#
I’m a little confused by the statements that it is impossible to save in the current environment.
It seems to me that saving can be done with any asset you like, be that in a commodity (gold, silver, real estate, etc), soft assets (stocks, options, etc), or a future claim on goods (currency).”
I think the gist is that it is not impossible, just not a priority because the movement of funds (investment in soft-commodities, stocks etc) is required in an economy being largely driven by debt service.
And your statement about the effect of technology on value is incorrect. Hard comodities do not loose value, they loose price. Their value is intrinsic, a part of what they are. There is a big big difference between value and price. Price is what you can trade it for. Value is how the measure of the trade is made. If the values are equal, then the price is irrealavent.
Dividendium,
it is the systemic destruction of the purchasing power of the monetary unit which tilts the table against saving and towards debt and consumption. It is very obvious that if the rate of return on savings were 5% in the free market, but under the central bank the interest rate is only 3%, there will be less savings. Furthermore, the artificial reduction in the interest rate is almost always coupled with an inflation of the money supply. This inflation rate must be subtracted from the interest rate to determine the real interest rate. If the inflation rate under a gold standard were 1%, but under the central bank it were 3%, it is clear that the net return on saving in the free market is 4% in this example, and the net interest rate under the Federal Reserve regime is 0%. Why would one save? Not everyone is an entrepreneur capable of making pure profits above the rate of interest. Those who depend on their savings, or the small returns of low risk investment vehicles are robbed of incentive to participate in the economy in this way by the interventions of the central bank. There is more to the weakness of this economy than an uneducated populace. The systemic problems are caused by faulty economic reasoning in the ranks of the technocrats.
Deefburger,
You might be right on the semantics of value vs. price, but my point is that there is no store of value that doesn’t have some risk of being worth less in trade later than it is now. Advances in technology could always make whatever your chosen store of value is worth less in trade in the future than it is today.
So it doesn’t make sense to me that the weakness of the dollar as a store of value is used as an excuse not to save. All stores of value have some risk of loss.
Stanley Pinchak,
When I say “savings” I mean producing more than I consume. So if I produce $50k in a year and spend $40k on expenses, then I have $10k left over as savings. I can now store those savings in any store of value I choose, be that dollars, gold, silver, bottle caps, pork bellies, whatever. (Just want to clarify vocabulary as I may not be using the words correctly.)
Now that I have savings, I can start looking at ways to earn a return on those savings. Your argument seems to be against the return that can be earned on savings in dollar form. If you don’t like the return on dollars, then shouldn’t you choose another store of value for your savings?
So essentially my question is, why would a gold backed dollar be any better for savings than just buying gold as your own personal store of value? And converting to dollars when you want to spend dollars, like converting to the local currency in a foreign country.
I’m also curious about your assertion that “not everyone is an entrepreneur”. Do you mean that society (aka government) should provide ways for people who are not entrepreneurial to make a return off of their savings?
Dividendium,
Most people save in dollars (or whatever the monetary unit is in their region) because money by definition is the most desirable commodity and is the common denominator in indirect exchange, giving it the most marketability. It is true that an individual could save or invest in a different commodity, or purchase shares in a company. The largest hurdle here is that the individual must exercise much more due diligence in this situation, become more of an entrepreneur than would be necessary if the table were not tilted so by the central bank. For the most part, people trust their banker and their mutual fund manager. When the returns that these options provide fall to nil when taking inflation into account, the great majority of the population is not willing to investigate opportunities with a higher return. For a regular blue/white collar worker to shift his production to the discovery of investment opportunities begins a process of breaking down the division of labor. This can only result in less leisure time for the worker, or a reduction in hours spent on his specialty. This will in turn likely result in a lower level of satisfaction as compared to the situation that obtains under the free market conditions (i.e. no systemic interventions by the central bank). It could also result in a lower level of satisfaction as compared with not saving at all. This is the most likely case and is hinted at by the dearth of savings that we see currently.
I don’t think that government should be creating investment vehicles for the people, but I also don’t think that the government should be manipulating the money supply in a manner that harms free market investment opportunities that the people are familiar with, but which can not return a profit under the conditions created by the state and central bank. The market has many low-risk investment opportunities of which several were widely understood by the public. Examples include: CDs and other time based bank loans, mutual funds, and government bonds. Of these, the first two are or can be compatible with the free market, the latter is not. Regardless, the returns from these instruments after inflation is near zero. I merely propose that the systemic bias against saving and investment be removed by the government, this would be a big step towards a healthier economy.
As for a specific discussion on gold money vs gold commodity under a fiat currency, the former is preferable most importantly because it restricts the ability of the state or central bank to create the systemic bias against saving in the first place. Furthermore, contracts not written in terms of legal tender are open for interpretation should the matter come before a state court. The hassles of converting to a commodity and back has inherent costs as well as governmental taxes and fees. There is a systemic bias against commodity money in realms where fiat money is legal tender.
Overall, I don’t see a point in blaming the mass of the people for their desire not to save. I do see a need for a change in central bank policy. Once that is enacted and you feel that saving is less than your standard, feel free to educate and raise awareness of the issue. Until that time, the education and awareness should be raised about the follies of the central bank.
Stanley Pinchak,
I find this conversation extremely interesting. If you’d like to email me directly rather than continuing it here, please do so at contact@dividendium.com.
Government creates the money supply by providing a currency in the first place. If government didn’t do this, then we the participants in the market would create a method of exchange out of necessity. We would likely come up with many different forms of indirect exchange, but they would probably be based on exchanging some easily portable commodity, or based on trust in some go between provider (like a credit card company for example).
Given the above, it would seem that government providing an easily understood currency is the same as government providing investment vehicles. Your complaint seems to be that the government provided investment vehicle is a poor one. But they aren’t removing any of the other investment vehicles, so people are free to choose whatever investment vehicle they want. If the goal is a free market, and it costs tax money to maintain a currency (printing and administrative costs), then wouldn’t it be preferable for government not to provide a currency at all?
“As for a specific discussion on gold money vs gold commodity under a fiat currency, the former is preferable most importantly because it restricts the ability of the state or central bank to create the systemic bias against saving in the first place. Furthermore, contracts not written in terms of legal tender are open for interpretation should the matter come before a state court. The hassles of converting to a commodity and back has inherent costs as well as governmental taxes and fees. There is a systemic bias against commodity money in realms where fiat money is legal tender.”
We originally had a gold back dollar and now we don’t, so it would seem that it does not restrict the ability of the state since we ended up here anyway. And the systemic bias is not against saving, it is against saving in dollars.
The argument about contract terms is true, but then we are talking about a situation where your investment has gone poorly and now you are trying to recover some of it through the legal system. I would take the lesson as “pick better investment opportunities and avoid the legal system”.
The hassles are definitely there for converting from a commodity, but as we’ve been discussing there are also drawbacks to using fiat money as your store of value. This just means that people have to make a personal choice as to which store of value has the fewest drawbacks for them. And it would seem that objections to taxes and fees are not arguments for a stronger dollar, but rather arguments against the tax system.
“Overall, I don’t see a point in blaming the mass of the people for their desire not to save. I do see a need for a change in central bank policy.”
I also don’t see a point in blaming people for their desire not to save. In all honesty I’m indifferent. It’s their choice to save or not and I can’t know that my choice to save is the correct one. If we’re all going to die tomorrow, then their actions are the more advantageous ones. But I do see a danger in attempting to shield the people from market forces or in catering to what the people already know and not expect them to learn something new.
Pinchak & Deefburger-
Although I used the term “model”, I did so hesitantly. Your Electrodynamic Economics idea is a beautiful analogy or metaphor, but Pinchak is correct in pointing out that human behavior does not follow physical laws (as a psychiatrist, I would be the first to admit this!). Nonetheless, it may be a useful idea to pursue in trying to teach us economic ingoramuses how money flows in the macro scale. Mises’ Human Action would analogously be the “Quantum Mechanics” of economics. Human behavior is mostly rational and predictable, but like Heisenburg’s uncertainty principle, there is also unpredictability on the subatomic/individual level. This is thought provoking!
Dividendium-
I think the term we should be considering in discussing savings is fungibility. The more fungible our savings, whatever forms they may take, the more they flow in the economy to help us all create wealth. Since we went off the gold standard, gold has lost much of its fungibility. You cannot close a business deal or buy gas with gold bullion very many places in our world today. Gold and real estate do not flow the way dollars do, if we are sitting on them and hoarding them. If we are putting them to use, then we are generating fungible wealth via dollar income that helps the economy. Both hard and soft assets, computers that depreciate, the bread that we eat, contribute to the generation of wealth, both directly in contributing to our individual productivity, and as they increase the flow of fungible value through society. But you are correct in implying that most such assets cannot really store value or wealth long term, and thus are not effective as investments or “savings.” Some things may be, such as valuable art, but then you are back in the situation of hoarding an asset rather than putting it to work. Our homes are not generating income directly, and gold sitting in a vault is not serving any useful purpose to generate further wealth, unless we are using these as collateral to generate money flow via debt. They are storing our wealth (I hope! The damned money pit!), but they are not being used to create more wealth, as fungible savings, which can be put into stocks to help businesses generate wealth or put into savings accounts to be lent back out by banks to help others generate more wealth. Real estate investments that can be put to commercial use for generating income and wealth, rental properties, commercial buildings, farms, etc., are increasing wealth via real goods and services and dollar flow in the economy. Buying a home to live in does not have as much of an effect in increasing economic production and wealth, and that is why the housing bubble which has diverted resources into malinvestmented homebuilding has so screwed up our economy.
There, we are back to why we are suffering, considering assets, dollars, debt, savings, and what is fungible and easily traded in our economy. I am a beginner in trying to understand money and banking. I am trying to teach my 12 yo son what he will never learn even in the best of the govt schools, so I have taken a new interest recently in furthering my own economic education.
Economists, have I stated this correctly? Am I making sense at all?
Maturin,
I think your point is that hoarding assets hurts the economy because those assets can’t be used to create more wealth.
I’m not sure I follow which of my points you were directing this rebuttal to though?
Thanks.
hoarding is perfectly neutral. it neither harms nor augments economic growth. to the extent that the hoarder refrains from consuming or investing, he contributes to the lowering of prices generally.
aside from personal character traits, when many people hoard it means that the investment outlook is highly uncertain or in rapid flux.
Dividendium, Newson,
I think my point last week was about the statement “that it is impossible to save in the current environment.” You pointed out that we could save in gold or real estate, which is in effect hoarding, as noted above. This may be “neutral” to the economy, but the whole idea of the importance of savings, and why we are in trouble today because we have “negative savings” in the form of debt, has to do with the type of savings. The more fungible the savings, the more it can contribute to real economic growth, rather than the pretend growth reported by the government in its statistics which hide the true inflation rate. Hoarded, less-fungible wealth, that which cannot be lent back out, is not helping our economy grow. If banks cannot get enough deposited savings to lend, the temptation for the banking system is to create unreal money, fueling inflation, and thus eroding our savings, regardless of what form they take, which is what the Fed has been doing for years.
I think the fear in the statement that it is impossible to save in the current environment is that conventional savings could end up with a long-term loss due to inflation. It is not “impossible,” but is it unwise to put your wealth into conventional savings in a bank?
As Newson points out, hoarding in the absence of fiat currency creation should cause deflation. We have not seen that occurring, despite everybody buying houses to hoard their “wealth” in. However, we may see it briefly in the short term right now, as the market attempts to correct, and businesses liquidate assets to hoard cash, to reduce the damage from the crash and recession. But will this short-term hoarding be more than offset by the Fed and Treasury pumping fiat currency into the system, causing massive inflation down the line?
Perhaps if we had been saving more and using less credit cards over the past two decades, the Fed would not have lowered rates to fuel the bubble and we would not be in such bad shape with our national debt, both public and private.
But then again, that assumes the Fed has our interests as “average citizens” in mind, to guide its behavior, rather than the interests of Goldman Sachs and the banksters. That has appeared to be a wrong assumption lately. Probably it would not have made any difference how much average Joes had saved, if the banking insiders who run the Fed and Treasury intend to enrich themselves at our expense, and will take advantage of fiat money to steal the value in our savings.
Oops, I am letting my paranoia show again!
Update:
Dr. Bob Murphy published a very elegant argument today, “The Importance of Capital Theory,” [http://mises.org/daily/3155] highlighting the fallacy of economic stimulus via govt interventions or planning. He also provided links to Garrison’s powerpoint presentations that summarize the differences between Keynes and Hayek in explaining savings and investment cycles. They are very clear and helpful in understanding the effects of fiat money on the business cycle.
Dr. Murphy’s sushi island economy is very entertaining and informative about how a planned stimulus subverts constructive investment, increases production and consumption short term, but ends up making all poorer long-term when the consumer side of the economy has to shrink back to its natural growth rate as we rebuild the depleted capital resources.
Key point relevant to the “impossible to save today” argument is that fiat monetary expansion ends up driving down savings, because it lowers interest rates artificially, which may spur consumption, but means less time preference for saving money if the yield return is artificially too low, with consequent malinvestment which is unsustainable. See the effect of fiat money (deltaM) on supply and demand curves Investment graphs in Garrison’s Hayek presentation [http://www.auburn.edu/~garriro/macro.htm]. As interest rates fall, so do real savings, driven by the “pretend” savings created by DeltaM which fuels artificial growth. It does not pay to save in that environment, especially if inflation due to DeltaM is greater than the interest rate returned on savings.
Hoarding gold or real estate may hedge against that inflation, but it does not contribute to real wealth creation through real and sustainable economic growth. The hoarded assets do not appear in the Savings curve of the investment vs interest rate graph. They cannot spur economic recovery as the market shrinks to correct the malinvestment.
So we get the Ourobourus Fed chasing its tail with ever more fiat infusions to prop up the inflated economy. Unsustainable, and the correction has to come, sooner or later. Later will hurt that much more, as the necessary deflation will be that much greater.
Maturin,
“You pointed out that we could save in gold or real estate…”
Just want to clarify that I was pointing out that we could save in anything, not just gold or real estate.
“The more fungible the savings, the more it can contribute to real economic growth…Hoarded, less-fungible wealth, that which cannot be lent back out, is not helping our economy grow.”
What would be an example of something that cannot be lent out?
I think there might be a logical inconsistency here. The above implies that that dollar savings need to be loaned in order to make the economy grow. But a dollar loan is just dollars.
The recipient of the dollar loan then has to spend those dollars to buy whatever it is that the recipient is going to use to create growth, be that flour, steel, oil, whatever. And to buy those “things” someone has to have “hoarded” them. If the things do not exist, no amount of dollars is going to be able to purchase them.
So, instead of hoarding dollars, if you were “hoarding” flour, you could loan your flour to the baker in order that he could make bread, and create value or growth.
Inserting the dollar into the transaction is just an abstraction and doesn’t fundamentally change the system.
“If banks cannot get enough deposited savings to lend, the temptation for the banking system is to create unreal money, fueling inflation, and thus eroding our savings, regardless of what form they take…”
My understanding is that inflation only erodes the value of dollar savings. To savings in other assets, inflation of the currency is neutral.
So being affected by the Fed’s manipulation of the currency, for good or ill, is to a large degree voluntary. If we don’t like the manipulation then we have the option to hold our savings in some store of value other than dollars.
Either way, the Fed is not preventing us from earning more than we consume, aka saving. Or from loaning those surpluses/savings to someone that we think might be able to create value with those savings.
I was googling for an economic analogy to Voltage, having an idea it should somehow correspond to demand. Following Deefburger and Maturins metphor I can now conclude that Voltage is Fed * Wall Street! Excellent, I guess that makes sense somehow as a push rather than a pull. There was a sign conversion in there somewhere that might have confused me a bit.
Concerning “rational” components, quantum mechanics and transistors, what about media?
Anyway, thanks for an interesting thread, pity it is a year old.
PS
I’m familiar with the electronics analogy from a paper belonging to the conspiracy lore where Voltage is defined as demand and currency as supply.
http://alternative-arboretum.blogspot.com/2009/07/silent-weapons-for-quiet-wars-manuaali.html
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