DISCOURAGING SAVINGS
The reason inflation--or more accurately
currency depreciation--discourages saving is obvious. Why hold onto a wasting asset? Why save your water if the only permissible form is by means of ice cubes on your shelf which will steadily melt away toward nothing? Drink it now, consume it while you still have some of it left! If the government permitted the water to be bottled,
then it would make sense to save it, because its quantity and real value to you could be preserved over time. So . . . inflation for this reason discourages saving, and thereby
automatically encourages consumption. But why is this SO bad? An explanation is required:
Modern economic theories adopted by virtually all governments today, not to mention virtually all the Economics Depts at Universities all over the planet, view CONSUMPTION as the cause of production, which is precisely the reverse of the truth.
It is savings, NOT consumption, which create economic progress in real terms, elevate the real standard of living for all, and in general make everyone in a society healthier, wealthier, happier, and more easily able to acquire their necessities as well as their dreamed-of luxuries. This is true not only by theory and common sense, but also by the empirical history of nations. The higher the accumulated per-capita REAL savings in a society, the wealthier the average citizen and the higher his standard of living. Again, why?
The analogy I like to use is a farmer whose annual crop is analogous to the REAL wealth produced by an individual, a company, or a nation. Once the production has been accomplished and the wealth (harvest) is in hand after any period of production, then THE #1 MOST BASIC DECISION OF ECONOMICS MUST BE MADE:
How much of this wealth should I consum now, and how much of it should I save for the future?
If the farmer consumes all his harvested corn he will live well. But next year he will starve because there will be no seed corn for the next crop. If a farmer of the other extreme is so greedy for his future wealth that he tries to save ALL his harvested corn for planting a HUGE crop next year, he may be able to grow a crop 50 times the size of the current year's and become very wealthy -- except that he will have starved to death before he could harvest it!!
IE, the most FUNDAMENTAL decision in economics is WHAT PROPORTION OF CURRENT PRODUCTION should be saved, and what proportion consumed? This is the SAME decision which must be made by individuals, corporations, and societies.
In REAL terms, saving is nothing more than the tightening of one's consumption belt today so that he may have more real wealth tomorrow.The truth is, the more you save today, the MUCH better off you'll be tomorrow, and the more of your produced wealth that you consume today, the MUCH less well off you'll be tomorrow. That's why government policies world-wide to encourage or stimulate consumption are the epitome of short-sightedness. That's what makes modern economic theories more appropriate for jungle animals than for human beings. Let's understand WHY all these assertions are true.
A certain minimum savings rate is required just to MAINTAIN the current standard of living.For the farmer, tractors will need repair and replacement, etc., just to MAINTAIN the existing level of corn production. Failure to save what's necessary to pay those minimal expenses will result in a smaller harvest next production season and hence a
declining standard of living -- the opposite of economic progress.
A choice to tighten the consumption belt a little further and save a bit more than this "stagnation minimum" IS NECESSARY IF ECONOMIC
PROGRESS IS TO BE ACHIEVED. Thus, excessive consumption is NOT the engine of progress, but the roadblock to it!! This can easily be seen by examining some simple numbers with the farmer analogy:
Let us say 2 bushels of seed corn will produce a 100 bushel crop. After harvesting it, the farmer consumes 98 of the harvested 100 bushels and SAVES 2 bushels for next year's planting. He will then repeat his result indefinitely, always consuming 98 of his 100 crop, using the "saved" 2 bushels as seed for the next crop, and then harvesting 100 bushels again so that he can again consume 98 and plant 2. Suppose, though, that he reads a modern day economic textbook and decides to do his bit for the economy by increasing his consumption -- to 99 bushels -- this year. Next year he will have only 1 bushel for planting, and will be able to produce a crop of only 50 bushels.Result? FAMINE. POVERTY. PLUS THE DESTRUCTION OF THE
CAPACITY TO PRODUCE REAL WEALTH. This is the result when you heed the highest and mightiest experts of the modern day economics profession.
Suppose instead this farmer had decided to tighten his belt a bit, and to consume only 97 bushels of his corn this year instead of his usual 98. He will now have 3 instead of 2 bushels for next year's seeding, enough to produce a crop of 150 instead of only 100 bushels. Result? PROGRESS. WEALTH. AND AN
INCREASING CAPACITY TO PRODUCE EVER MORE WEALTH. He can now decide to consume 147 bushels every year and plant 3 and because he will have become
PERMANENTLY ENSCONCED AT A NEW, HIGHER LEVEL OF WEALTH, courtesy of his decision to tighten his consumption belt a little and save a little more. He may now choose to "stagnate" at production of 150 bushels each year, consumption of 147, and savings of 3 bushels to produce another 150 bushel crop--instead of the 100, 98, and 2 respectively which he'd lived with every year previously.
However, if this farmer is not quite as un-ambitious as this, if he is willing to increase his consumption from its previous 97 to "only" 146 bushels this year instead of all the way up to 147, then he will have FOUR bushels to plant the next season, and a crop of 200 bushels. He can then increase his real wealth consumption from 146 up to 195, and he will have FIVE bushels left to plant, for a crop of 250 bushels the following year. ETC.
THE NATURAL COURSE OF HISTORY, WHEN RATIONAL MEN ARE LEFT FREE, IS UNINTERRUPTED, CONTINUAL ECONOMIC PROGRESS IN REAL TERMS--LITERALLY A PERENNIAL ECONOMIC BOOM.
Down through the ages, there have been only few, temporary, and/or isolated situations in which men have been able to make this choice. The plunder of marauders and tyrants always interfered. The exception was the REVOLUTION in thinking which our Founders embodied in the American Revolution. It resulted in the longest and mightiest engine of economic progress in human history. But it has been succumbing to a new enemy of progress:
stupid ideas such as the one that government can create progress by enforcing economic policies which reward consumption and penalize saving--thereby continually creating roadblocks to progress by continually working to destroy progress' motive power.
I've used a simple example but it is VERY accurate and illustrates perfectly the principle by which this aspect of our world functions. A relatively small increase in consumption can cause relatively MASSIVE destruction of wealth, and what's even worse, it will deprive us of the ABILITY TO IMPROVE OUR STANDARD OF LIVING LATER ON by means of a very large,
semi-permanent setback in our progress which insufficient savings and excessive consumption create.
The other side of the coin is that even a ONE TIME belt-tightening will serve to "ratchet upward" the real wealth production and consumption for the future, as far as the eye can see, merely by adopting the new "equilibrium" amount of savings necessary to maintain the new, higher level of wealth production which that one-time belt-tightening served to create. But should even a tiny additional piece of the increased production also be added to savings on a regular basis, then
PERMANENT PROGRESS WILL BECOME A RELIABLE, ALWAYS-TO-BE-EXPECTED FACT OF LIFE.
This simple example may also have given you a clue about the origin of the phrase "the power of compounding" when one earns interest on his savings. The foregoing is the REAL process which underlies and enables the power of compounding to work miracles for humanity--if only it is allowed to. When the money is stable and preserves its value over time, when the money is itself a REAL good, then it reflects the REAL events in the economy, and the holders of money--savers--see the economy's REAL progress (as described above) reflected in the ever-increasing amount of REAL goods their REAL money will buy.
Obviously then, by discouraging savings and encouraging consumption, inflation is a
far more sinister and powerfully destructive force even than it seems to be upon the cursory examination it is usually given. Unfortunately, the insane economic theories so universally accepted today are based on precisely the opposite--and devastatingly wrong--"understanding."
THIS IS THE FUNDAMENTAL REASON UNDERLYING OUR NATION'S ECONOMIC CRISIS TODAY. It will NEVER be cured until inflation of the fiat money supply is ended--things will only
continue to GET WORSE WITH EVERY PASSING YEAR.
In short, the entire profession of modern day economics is wedded to a false religion which worships that devil, consumption NOW.
DESTROYING THE REAL VALUE OF SAVINGS
Obviously, if your savings are in the form of a fiat currency (or anything else that is continually losing value relative to other goods), then by definition this means a continual decline in the real value (the power to purchase real wealth) of your savings.
This is another consequence of the inflationary economy, ie of the economy managed according to the insane theory that consumption is the cause of wealth production. Yet this IS the very theory that is COMPLETELY accepted by all predominant modern theories of economics, and the premise on which all government economic policies are based. IE, it is our policies themselves which actively destroy wealth, prevent progress, and work to CAUSE continual regress. The more effectively modern economists and economic advisors do their jobs, the more damage they do the economy.
THIS is also the reason why old age has slowly but surely become a virtual sentence to poverty over the past many decades. Basically, our policies create massive incentives for behaviors which result in
the consumption of our seed corn, and thereby guarantee that over time, we will all become continually poorer as the nation as a whole reaps an ever-shrinking harvest, year after year.
Again, this is a simplified picture of the world, but it is nevertheless a 100% accurate explanation of the true cause-and-effect relationship between consumption/savings and inflation/deflation.
OTHER FACTORS
There are of course other things which affect man's progress, things which are not of an economic nature, but which have potential economic implications & effects.
Man learns, and continually adds to his knowledge. He discovers new facts about the world, and he invents new ways to produce more wealth with less effort. Man's will to survive and his desire to improve himself are what drive progress in THE PHYSICAL METHODS OF SOLVING THE "PROBLEM OF PRODUCTION" (ie, the problem of surviving and flourishing).
If we were to revert to the simple example of the farmer and try to incorporate this fact into it, then we would have to discuss the effects of developing new hybrids of seed corn which yield ever larger crops from the same amount of seed, and better tractors which cost less to produce and yet can accomplish more wealth creation. But the numbers used to explain the basic example above are still a completely correct explanation of the ECONOMIC cause/effect relationship of savings/consumption and their contribution to progress and wealth creation. It's just that there is another factor--the ingenious human mind--which also has an effect, and in the real world of course, the result will be the net sum of both factors, the physical results of man's practical ingenuity and the economic effects of how it is applied.
The physical/technological effects are the ever-improving tools we have to work with. The economic effects are the conditions & rules under which we may use those tools. Scientists, engineers, and inventors keep improving our tools, while the economists keep interfering with our ability to use them effectively. This--enforced bad ideas--is the modern day substitute for plunder, marauding, and tyranny.
So . . . over time man's ingenuity has been, from one perspective, a negative. It has served to rescue us from the full consequences of our unquestionably insane economic policies. In short, our scientists and engineers have helped to ameliorate the damage done by our professional economists, politicians and university economics professors.
There is only one actual, factual history, and there is only one set of true numbers which correctly describe the past. The work of scientists and engineers--ie, man's ingenuity, creativity, and ambition to improve his own lot--have played a major role in PREVENTING our nation's economic numbers from declining far more sharply than they would have if everything had been left only to the insanity of the economics professors and politicians. The work of the scientists, engineers, and inventors has ENABLED the charlatans of politics and academia to point to an economic history whose numbers are not nearly as bad as their own efforts would have made them--and this has further enabled the economists to claim a credit for progress which they in no way deserve. Had it not been for the non-economists who do know how to think and who do have common sense, our economy would probably already have been thrust down much closer to the levels of bare subsistence. The NON-economists have continually provided us with better tools with which to fight against the destruction caused by the economists or to "get around" the obstacles the economists have placed in the path of human progress. And so we are more content to accept the idiotic ideas of the economists because the pain of their influence on us has been blunted.
In short, by saving us from the full havoc wreaked by the economists and politicians, the men of ideas and creativity have postponed the revelation of the worthlessness of modern economists, modern day politicians, and modern day economic doctrines. It has taken many decades rather than only a couple for the devastating DESTRUCTIVENESS of modern economic theories--and of modern governmental economic policies--to become obvious
primarily because of the inventors, scientists, and engineers. That is the downside of having scientists, engineers, and inventors to save us: their work helps enable the economists to stay in business by stealing credit for an efficacy they do not deserve.
From another perspective, it might fairly be said that modern economists in and out of academia, along with politicians, are destructive parasites, an unmitigated disease inflicted on society, whose continued existence is made possible only by good men who continue to strive in productive areas so successfully that the destructiveness of the parasites has been overcome for much of the past century. The parasites kept increasing the weights placed around the economy's neck, and the productive kept working harder and smarter to find ever-better ways for us to carry the increasing deadweight and still make it across the finish line. What we have never had the chance to see is what our world would have been like if men had been left free from the parasitic incompetents in the halls of politics and the ivory towers of modern economic academia.
(Corollary to the foregoing: don't let your child major in economics at any major university, anywhere. Buy him a few free-market economics books instead.)
For an interesting aside, it should be noted that deflation--the alleged nemesis of economic progress according to our mentally deficient economic geniuses--is actually the natural and beneficial course of a free and ever-progressing economy. The generation of this nation's greatest real growth was the one just preceding the establishment of the Federal Reserve Bank, the one ending in the first decade of the 1900s. At that time the unemployment rate was effectively ZERO. NO ONE who wanted work went without a job. Because of the waves of mass immigration during that generation, our nation's population DOUBLED in a single generation. Yet the REAL earnings of the average worker ALSO DOUBLED.
Prices steadily declined during the period, yet in real terms the nation's productive capacity was running--by the end of the period--at QUADRUPLE the rate it had been running when the period had begun one generation earlier. We absorbed MASSIVE waves of new people, and not only did our free economy feed and clothe and house them, but it did so in style, producing fully 400% as much REAL wealth at the end of the period as it had been producing just one generation previously at the start of the period--enough for each of TWICE as many people, to earn TWICE as much real wealth, after only 1 generation. And I repeat: not only was it the generation of the greatest rate of economic growth in our nation's history, but it was a generation blessed with CONTINUAL DEFLATION.
We have never witnessed a comparable period of real growth coming close to that generation's since. It occurred under steady deflation--ie, steady INCREASE in the purchasing power of the currency. But the FED--the greatest engine of inflation ever conceived in all human history--was born in 1913 and began its campaign to put a stop to that phenomenal NATURAL rate of growth in genuine REAL wealth and well being for all Americans, in an economy of NATURALLY occurring steady deflation.
Life was a terrible burden for most men during most of human history. The USA was a miracle--a genuine miracle, and in fact a myriad of miracles--enabled by the FREEDOM and free markets which the American Revolution provided its citizens. When we consider the miraculous discoveries in medicine in recent decades, the power of modern computing and communications, the fact that we mastered space and put men on the moon within the past 2 generations, it is astounding that the average household is finding it harder to make ends meet with every passing year. The typical American wage-earning household now has TWO wage earners and is still fighting to keep its head above water. The AVERAGE American should be living today at a level which compares, in real terms, to the lifestyle which only one of today's multi-millionaires can afford.
We can thank the politicians and the economists for the destruction of far more wealth than probably anyone alive can come close to visualizing. Their effect has been to constrict the flow from the cornucopia of wealth production which had naturally sprung from the freedom and free markets our founders had bequeathed us.
Before ending this topic, I want to hint at the next topic it logically suggests without actually engaging it fully herein. It's the interest rate.
The interest rate in an advanced economy is what determines the savings/consumption decision--or more accurately, it's what reflects the NATURAL, freely decided consumption/savings decisions of each free citizen. Actually, it is the relative values people place on future versus current CONSUMPTION goods which determine the savings and the interest rate IN A FREE MARKET. When the government, or its central bank, FORCEFULLY acts to maintain a MANDATED, CENTRALLY CONTROLLED interest rate, then the causality reverses, and it is the interest rate which determines the amounts of production which are allocated to savings and consumption by creating false incentives and disincentives which influence citizens to behave differently under the manipulated UNNATURAL conditions mandated by government or central bank policies. IE, citizens make their decisions based on information which reflects the ideas of the central bank and government, NOT the real world. THIS is a glimpse at the reason why the operation of a central bank is SO destructive to wealth creation and SO destructive of economic progress, every time it "targets" the interest rate--up or down--and uses a centrally-controlled monetary policy to achieve its target.. The FED destroys real wealth with EVERY action it takes, in EITHER direction, with the only exception being SOME OF the occasions when the action it takes is to rescind or reduce a previous intervention in the economy. A full demonstration of why this must be true will have to await a future article. But here's just a bit more of an overview:
We have seen the tremendous influence on progress created by small changes in the savings rate in the example of the farmer and his corn crop. When a central bank manipulates interest rates,
it forces such changes ARTIFICIALLY onto every economic entity in the economy. Per currently accepted economic theory, these arbitrary manipulations of interest rates are usually aimed at increasing CURRENT CONSUMPTION, and we saw from the above how even a tiny change in CURRENT consumption can MASSIVELY reduce the standard of living and MASSIVELY cripple the ability to create wealth. In short, even tiny changes in CURRENT consumption result in MASSIVE changes in our ability to consume
in the future. That's why a central bank is, by its nature, a powerful engine of economic destruction, capable ONLY of diminishing economic progress, NEVER of enhancing it. By operating on a policy committed full steam ahead to increasing current consumption, our modern day alchemists of economics destroy our ability to consume in the future. Every time our producers figure out a new way to create another golden goose for us, the economists and politicians get to work on their plans to kill it.
Ending inflation by abolishing the Fed, by abolishing a central bank of any kind, by repealing the current legal tender laws, and by getting the government entirely out of matters of the economy are the only long term solution to our nation's problems. Where there is freedom there is ALWAYS hope, and where freedom prevails miracles ALWAYS become the routine. The value of every new golden goose is respected, and their flock flourishes, and the supply of golden eggs continually increases for all of us.
America showed a mostly dismal human history that a paradise is in fact possible even for "the masses" as a whole right here on this earth, and if we have the moxie NOW to get rid of our statist politicians, our government management of the economy, our central banking system, our legal tender laws
AND THE UTTERLY INSANE ECONOMIC THEORIES UNIVERSALLY ACCEPTED BY THE QUACKS AND CHARLATANS WHO FILL OUR NATION'S UNIVERSITY ECONOMICS DEPARTMENTS, then we will quickly see not only an end to inflation but an immediate resumption of the never-ending sequence of ENORMOUS miracles with which our nation awed the world during its first 150 years.
