Saving Will Save Us

Those who speak with me on a regular basis about economic issues know that I have been skeptical about this V-shaped recovery in the making. On many occassions I've made a point to say that either cascading inflation will rip through the economy or we will descend back into economic contraction.

On the fiscal front, I remain doubtful that drolls of money passed out to open hands will provide substatial means for recovery. The problem, the very epicenter of the economic crisis was the asset bubble inflating the housing market. Nothing in the fiscal stimulus has done anything to address that problem. Some of the systemic risk may be mitigated, but nothing has been done to amend the real-estate depression.

All we've done is attempt to stimulate consumer spending. Now if that attempt is met with success (which is debatable), even if we can get people to spend more and banks to lend more, I submit to you this is no means for sustainable economic growth. Consumers buying products is the end result of a healthy, productive economy. By contrast, the origin of a healthy consumer economy is savings. Saving and investment allows for any firm (large or small) to develop new and better products, more efficient means of producing them, and new technology to streamline their efforts. The end result is either higher quality of goods and services, more cost effective products, or some combination of both. And that is precisely what drives consumer spending. Hence, consumer spending is a byproduct, a result of a healthy economy.

In essence, the whole system is turned on its head. How did this happen, you ask? The economic realty that saving and investing drives growth, not consumer spending, has been willingly ignored for various political reasons. Politicians and bureaucrats always need reasons to buy votes and pander to their electorate. Why waste time in an economic downturn? It is popular to give hand outs, freebies, and "stimulus" to people. Hell, I'll bet it polls pretty well compared to the alternative of saving, investing, patiently awaiting a return on invested capital.

If the political class can fool people into believing that if we all just spent more money we can save the economy, they are then able to spend their stimulus, and get all the votes money can buy. And so their power grows with a bought-and-paid-for voting bloc (along with the size of Congress' credit card bill). The ultimate problem with pegging economic hopes on consumerism is that consumer spending will always ebb and flow. Inevitably faulty desicions, natural disasters, wars, etc. will cause periods of economic growth and contraction. However, these periods don't have to be so dramatic and painful to bear. When times are tough, people stop spending. And if the life-blood of the economy is consumer spending, cardiac-arrest ensues. Thus when consumer spending is considered the driving economic factor, the highs will be very high but the lows will be...well look at the past recession.

What if people were encouraged by their political leaders (via tax breaks, public address, etc.) to save during times of growth instead of spend, get a credit card, spend again, leverage again, spend some more? In my little fantasy, if a natural contraction occurs, people will have a large cushion to absorb the loss of income. Thus, the economy wouldn't end up wretching in pain at hte loss of income. But in today's "cash-for-clunkers" world, you get a tax break for spending! It's a sad world we live in.

This messy situation an unfortunate reality of the politicized nature of our economy. When the government is so powerfully injected into private enterprise (whether by means of regulation, stimulus, tax gimmicks, corporate welfare, the list goes on) it's difficult to see an economy growing on a sustainable trajectory. Hopefully, people will start to wake up to the shilly-shallying going on in D.C. (perhaps they already are) and we can end this ridiculous Keynesian central-planning.

And in my opinion, among the first things to go should be this idea that consumer spending makes the economy grow. We can just do away with that. Saving provides capital, capital enables ingenuity, and thus the economy grows. Saving will save us from this fine mess we're in.