Dear Reader,
Reports Statista:
- American households accumulated $2.1 trillion in excess savings between March 2020 and August 2021…
- Three inflation-plagued years later, Americans have burned through those excess savings, and then some.
- At the end of September 2024, Americans had collectively saved $291 billion less since March 2020 than they would have been projected to if the pandemic had never happened.
Here the picture talks its thousand words:
Source: Statista
U.S. Credit Card Debt Runs to Record Heights
Where does a lady turn when she has depleted her piggy bank?
She sinks fingers into her purse… and lifts up a credit card.
United States credit card balances swelled $24 billion in 2024’s third quarter — 8.1% above 2023’s third quarter.
Meantime, United States credit card debt exceeds $1.17 trillion. That is a record figure.
Mainstream economists inform us it is not a symptom of economic distress. It is rather a symptom of economic vigor.
Yet I am not half so-convinced.
If the United States savings rate jumped in tandem with its credit card debt, it would not fluster me.
Yet the United States savings rate has not jumped in tandem with its credit card debt.
It is instead running the other way.
The Centrality of Savings
Savings form the granite bedrock of a sound economy.
An economy erected upon this granite is a rugged economy, a durable economy.
The credit-based economy — the debt-based economy — is not.
“From time immemorial proverbial wisdom has taught the virtues of saving,” wrote economist Henry Hazlitt 78 years ago, “and warned against the consequences of prodigality and waste.”
Yet to modern economics… prodigality and waste are not vices. They are very nearly virtues.
Instead the saver is the high villain of modern economics. He is a public menace, a saboteur of sorts, a rascal.
Some individual savings may be indulged. concedes the economist of Keynesian leanings.
Yet if the entire nation tied down its money in savings?
All species of economic calamity would ensue.
We Must Spend!
Thus Mr. Keynes’ boosters bellow:
If all saved a savage cycle would feed and feed upon itself… until the economy is devoured to the final crumbs.
The great gears of industry would grind idle.
Consumption would dwindle to near-nonexistence.
Meantime, waves of bankruptcies would wash through the national economic apparatus — all owing to the recalcitrance of savers.
If only they would untie their purse strings.
And so you have the paradox of thrift, so-called. It is perhaps the mother myth of economists in the Keynesian line.
The Mother Myth, Explained
Mr. Christopher P. Casey directs WindRock Wealth Management. Here he strips the thrift paradox bare:
- The paradox of thrift (is) the belief that increased savings, while beneficial for any particular economic actor, has deleterious effects for the economy as a whole.
- The paradox of thrift can essentially be described as such: Decreased consumer spending lowers aggregate demand which reduces employment levels which negatively affects consumption which in turn lowers aggregate demand. The paradox predicts an economic death spiral from diminished demand.
Yet let us reduce the thing to its components. We discover that no paradox exists whatsoever.
The anti-savers and consumption-firsters have forgotten their Say’s law…
Say’s Law
“Products are paid for with products,” argued Jean-Batiste Say over two centuries ago.
That is, production precedes consumption. And supply creates its own demand.
For example: 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.
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 has produced. And because he has produced, he can consume.
Thus the saver is not a man to be condemned for his profligacy — but applauded for his frugality.
Money Doesn’t Change Anything
The baker and the cobbler may transact in money — direct barter is primitive. Yet upon closer examination we see they transact in indirect barter.
Money merely throws an illusory veil across the transaction.
Ultimately the baker purchases his shoes with the bread he has baked. And ultimately the cobbler purchases his bread with the shoes he has cobbled.
That is, each has paid for his items through savings.
Do not let the money veil deceive you!
Putting the Cart Before the Horse
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 monetary flood. The torrents merely flow into existing stocks of goods.
And as the rising tide lifts all boats… the rising monetary tide waters lifts all prices.
Thus, inflation.
Where is production in the demand-side theory? It is left occupying the junior and subordinate position.
Savings and Investment
Let us take up an additional question: Are savings the enemy of investment?
Must we sacrifice savings to invest? The answer is no.
As there can be no flowers without seeds… there can be no investment without savings.
The late “Austrian” economist Murray Rothbard:
- Savings and investment are indissolubly linked. It is impossible to encourage one and discourage the other… In order to invest resources in the future, [a man] 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.
Now I revisit consumption…
Savings Equal Consumption
We are told that consumption represents some 70% of the gross domestic product.
Hence slackening consumption represents economic evil.
Yet when society saves, it does not destroy consumption. It merely postpones consumption.
And 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 facilitates greater consumption tomorrow.
A Warning
We must conclude that there can be no excess of savings. Savings equal stored wealth. The two are one.
The abovesaid Hazlitt:
“‘Saving,’ in short, in the modern world, is only another form of spending.”
Thus the society that fails to save today cannot spend tomorrow.
It confronts a future of limited growth… slender prospects… and frustrated ambitions.
This society — alas — is American society.
Regards,
Brian Maher
for Freedom Financial News
