For Tomorrow We Die…
Brian Maher

The United States savings rate runs to 3.20% — down from 3.60% one month prior.

As history has it, 8.47% is par.

Meantime, 36% of Americans carry more credit card debt upon their shoulders than emergency savings in their pockets.

Mainstream economists inform us it is not a symptom of economic distress. It is rather a symptom of economic vigor.

For example, Ameriprise Financial’s Russell Price:

Consumers still have a lot of money left over to be able to spend, so the credit card data is often misinterpreted. The dollar value of credit card debt is at an all-time high, but so is population, employment and consumer income.

Yet we are not half so-convinced.

The Centrality of Savings

If the United States savings rate jumped in tandem with its credit card debt, it would not fluster us.

Our ears would be opened wide to this fellow’s belchings.

Yet the United States savings rate has not jumped in tandem with its credit card debt.

It is instead running the other way as debt gallops and gallops. And as we have argued before, savings form the granite bedrock of a sound economy.

Modern economics has waged warfare upon savings… and prudence.

If all saved too much money a savage cycle would feed and feed upon itself… until the economy is devoured to the final crumbs.

Consumption would dwindle to near-nonexistence. The gross domestic product would collapse in a heap.

Waves of bankruptcies would wash through the national economic apparatus.

All this owes to the recalcitrance of savers. They refuse to untie their purse strings — and spend for the greater good.

This paradox of thrift is perhaps the mother myth of economists in the Keynesian line.

Yet as we have also argued, no paradox exists whatsoever.

We maintain that saving is an unvarnished blessing — at all times — under all circumstances.

Say’s Law

“From time immemorial proverbial wisdom has taught the virtues of saving,” wrote Henry Hazlitt 78 years ago, “and warned against the consequences of prodigality and waste.”

But to the anti-savers… prodigality and waste are near-virtues at times as these.

They have forgotten their Say’s law — perhaps purposefully.

Say’s law holds that supply creates its own demand. “Products are paid for with products,” argued Jean-Batiste Say over two centuries ago.

Production must precede consumption.

One man produces bread. Another produces shoes.

Let us say the baker bakes a baker’s dozen — 13 loaves of bread. He consumes two of them.

The remaining 11 loaves represent his savings. He can peddle them for other goods — shoes in our little example.

The Cobbler

Meantime, the cobbler cobbles together 13 pairs of shoes. He requires one new pair for himself.

He further sets aside two pairs for his blossoming children.

This fellow “consumes” three pairs of shoes, that is.

The remaining 10 constitute his savings. Like our baker, he can exchange his savings for goods.

He did not plunge into deficit — debt — to acquire these goods.

He has acquired them through honest toil. He has produced.

And because he has produced, he can now consume.

We must conclude that there can be no excess of savings. Savings equal stored wealth.

Putting the Cart Before the Horse

To argue that savings injure society is to argue that wealth injures society.

And savings spring from production.

Thus the saver is not a man to be condemned for his profligacy but applauded for his frugality.

Yet he is the high villain of modern economics.

He is a public menace, a saboteur of sorts, a rascal.

The enemies of savings rotate Say’s law upon its head. They sob not about a lack of production — but a “lack of demand.”

That is, they place the wagon cart of consumption before the draft horse of production.

The monetary authority must race the printing press to make the shortage good, to furnish the lacking demand.

But no new production accompanies the flood of money. The additional money merely chases the existing warehouse of goods.

It is the pursuit of alchemy, of lead into gold, of the free lunch.

It is the half-conscious belief that the print press is the spark plug of prosperity.

It neglects production.

Saving Equals Investment

Yet there can be no investment without savings… as there can be no flowers without seeds.

Explained the late economist Murray Rothbard:

Savings and investment are indissolubly linked. It is impossible to encourage one and discourage the other. Aside from bank credit, investments can come from no other source than savings… In order to invest resources in the future, he must first restrict his consumption and save funds. This restricting is his savings, and so saving and investment are always equivalent. The two terms may be used almost interchangeably.

The more accumulated savings in the economy… the more potential investment.

An economy built atop a sturdy foundation of savings is a rugged economy, a durable economy.

This economy can absorb a blow. The debt-based economy cannot absorb a blow.

In the past we have cited the example of a frugal farmer to demonstrate the virtue of savings.

Today we cite it again…

The Frugal Farmer

The frugal farmer defers present gratification. He conserves a portion of prior harvests… and stores in a full silo of grain.

There this grain sits, seemingly idle. But this silo contains a vast reservoir of capital…

This farmer can sell part of his surplus. With the proceeds he purchases more efficient farm equipment. And so he can increase his yield.

Meantime, his purchase gives employment to producers of farm equipment and those further along the production chain.

Or he can invest in additional land to expand his empire. The added land yields further grain production.

This in turn extends Earth’s bounty in wider and wider circles — and at lower cost.

Surplus builds upon surplus.

He further retains a prudent portion of his grain against the uncertain future and the wicked gods.

There is next year’s crop to consider. If it fails, if the next year is lean, it will not clean him out.

Because he has saved, he has plenty laid by. Thus his prior willingness to defer immediate gratification yields a handsome dividend.

Without that savings base of grain… he is a man undone.

We will call this man Farmer X. Contrast him, once again, with Farmer Y…

The Wastrel Farmer

This man enjoys rather extravagant tastes for a farmer. He squanders his surplus on costly vacations, restaurants, autos, etc.

Thus he is the hero of the Keynesian economist. His lavishness sets in train a cycle of virtue that expands and multiplies prosperity.

It is true, his luxurious appetites keep local business flush. But his grain silo perpetually runs low.

That is, his capital stock runs perpetually low. That is, he has little savings. That is, he has little to invest.

He deprives the future so that he may gratify the present… and rips food from future mouths.

And should next year’s crop fail, this Farmer Y is in a dreadful way.

Assume next year’s crop does fail.

The surplus grain that could have sustained him he has dissipated. He has no reserves to see him through.

He is hurled into bankruptcy. He must sell his farm at a fire sale.

And the local enterprises that had fattened upon his business go scratching… for they had enjoyed a false prosperity.

If only this sybarite had saved.

The Lesson

Multiply this example by millions and the lesson is clear:

A healthy economy requires a full silo of grain — of savings, that is.

An empty silo means no investment in the future.

Society has nothing stored against future perils.

And when society saves in lean times, it is not eliminating consumption. It is merely postponing it.

The demand that is supposedly lost is not lost at all. It is simply shifted toward the future.

Thus today’s savings are therefore tomorrow’s spending, tomorrow’s consumption.

By reducing consumption today… society allows greater consumption tomorrow.

Says Hazlitt:

“‘Saving,’ in short, in the modern world, is only another form of spending.”

Thus the society that fails to save confronts a future of limited growth… slender prospects… and frustrated ambitions.

This society — alas — is the American society.

 

Brian Maher is the Daily Reckoning’s Managing Editor. Before signing on to Agora Financial, he was an independent researcher and writer who covered economics, politics and international affairs. His work has appeared in the Asia Times and other news outlets around the world. He holds a Master’s degree in Defense & Strategic Studies.

 

 

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