Over the last several decades, the Federal Reserve and the US government have almost exclusively directed their policies toward “stimulating” spending. Artificially low interest rates incentivize borrowing and discourage savings.
But spending money isn’t the only thing that makes the economy go around. Savings are crucial and the lack of saving in America has hollowed out the US economy.
Modern economists trained in Keynesian thinking eschew savings. As economist Frank Shostak explains in an article published by the Mises Wire, “It is held by most mainstream economists that spending is the heart of economic activity. Economic activity is depicted as a circular flow of money. Spending by one individual becomes part of the earnings of another individual, and vice versa. In contrast, saving is viewed negatively as it weakens the potential demand for goods and services.”
Driven by this mainstream view, modern monetary policy almost always emphasizes economic stimulus. We see this in the unprecedented Federal Reserve money printing and the massive borrowing and spending binge by the US government in response to the coronavirus pandemic.
But this approach ignores the process of creating goods and services.
One undeniable truth is you have to produce before you can consume. Shostak offers a simple example.
For instance, when a baker produces bread, not everything he produces is for his own consumption. In fact, most of the bread he produces is exchanged for the goods and services of other producers, implying that through the production of bread, the baker generates an effective demand for other goods. In this sense, his demand is fully backed by the bread that he has produced.”
The development of capital goods — tools and machinery — drives production. But these have to be produced as well. That requires some consumer goods to be sacrificed or diverted for the production of capital goods. As Shostak put it, “In order to make them, people must allocate consumer goods that will sustain those individuals engaged in the production of tools and machinery.”
This allocation of consumer goods is what savings is all about. Since saving enables the production of capital goods, saving is obviously at the heart of the economic growth that raises people’s living standards. Observe that the saved consumer goods support all the stages of production, from the producers of consumer goods to the producers of raw materials, the producers of tools and machinery, and all the other intermediate stages of production and services. Also, note that individuals do not want various tools and machinery as such but rather consumer goods. In order to maintain their life and wellbeing, people require access to consumer goods.”
The introduction of money into the economy tends to obscure this process. But as Shostak observes, it doesn’t fundamentally change the equation.
Source: SchiffGold
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