“You get rich by saving and investing”

WRITES the sane (what passes for sage these days) Bill Bonner:

Two generations of American economists thought the way to bring prosperity was to encourage consumption. On the face of it, the idea is absurd. Classical economists…and Daily Reckoning commentators…laugh at the idea. You don’t really get rich by consuming; you get rich by saving and investing.

Bonner suggests that the underlying force for the problems we face today is our ceding of personal economics to vaunted elites, whom we believe know better than what common sense intones:

But they had their charts and graphs…their theories and their jobs teaching economics at prestigious universities. Naturally, they had the feds’ ears too – since every politician wants to promise more consumption. The feds favored home ownership, for example…even by people who were bad credit risks. They set up Fannie and Freddie to make it easy for people to buy houses. They even passed a law requiring banks to lend to people who weren’t likely to pay them back; that was the origin of the sub-prime mortgage market! They kept interest rates low, too, so people could borrow at affordable rates. And they inflated the currency, so consumers would want to spend their money rather than save it. They also opened the world to free trade, so Americans could buy more, cheaper stuff made by foreigners. For 50 years, they cultivated consumption and let production go to seed.

And now…wouldn’t you know it…Americans have over-consumed. Personal expenditures per capital rose 25% between 2003-2005. Personal debt soared to over $13 trillion…about $124,000 per household. Total debt/GDP tripled since 1980.

And now, it’s payback time. The private sector has cut back. Consumers need to under-consume to make up for the over-consumption of the bubble years. Savings rates are rising. Spending is falling (see below)…

And so what do the simpletons do? Private citizens are unwilling to consume…so they push the government to consume their money for them!

I was caught up in the hoopla to some extent, making use of the pseudo-equity in our home to consume much as we renovated our home, had a nice honeymoon, and generally threw caution to wind insofar as our budget. I basically did not have a budget from ~2004 – 2008. I largely did not require one earlier, as a single and childless man of means. Now it is a necessity if we are to survive, particularly with inflation looming.

Rather than popping our personal balloon, we are slowly deflating it: spending less than we produce and repaying our debts via the “snowball method“. See the link for more information on that.

Feedback