Savings, not consumption, grows the economy

It's hard to believe, but in a country where thrift was once a virtue, it's become a vice in the view of many.

The blame lies clearly with economists and politicians who try to reverse cause and effect.  Their attempt fails when confronting the facts.

Imagine yourself on an island in the Pacific Ocean without any outside contact.  Do you think you could grow your standard of living by eating more, or by storing food?

The answer is obvious.  You can't consume what you haven't produced.  You can't live in the shelter you haven't built, you can't eat the fish you haven't caught, and you can't escape on the boat you haven't constructed.

To have the time to build the shelter and boat, you'd have to put enough fish aside so you could build instead of fishing.  You can't both build and go fishing, and without fish you'd starve.  To grow your standard of living, you have to forgo consumption by eating less, which then becomes savings.  The savings then allows you to build shelter and a boat.  Savings is what leads to growth, not consumption.

And, so it is in the world economy.  To get to the point where we have shelter, transportation, clothes, etc., we need to first save up enough food to have the time and resources to devote to building the other things we need.

Here's another example.  Assume you want to open a store that sells clothes.  To rent the store, purchase inventory and pay employees, you need money.  You can't use the sales revenue you haven't gotten yet.  You need to use someone else's savings.  Once those savings are used to rent the store, buy the inventory and pay employees, you can pay back the person you borrowed from.  But, you can't borrow what's been consumed--it must be saved first.  The lender has to save instead of consuming in order for the store, the jobs or the clothes to ever exist.

Once again, so it is with the world economy.  To create growth, hire new employees, etc., you need savings first.  Savings that are invested create growth.  Consumption can't do it.

If you spend more than you produce, your standard of living will go down.  That's just a fact.  You can't spend your way to prosperity.  You have to save first.  But, to save, you need to spend less than you make.

Sometimes, savings doesn't produce growth.  As illustration, suppose you put enough fish aside to build some shelter, but a storm comes along and blows it away.  Now, you have to save enough fish up, again, so you have enough to get by as you rebuild a new shelter.  Consumption won't fix the problem, only more saving. 

Using my second example from above, suppose the clothes store fails--suppose buyers are not interested enough in the clothes to pay as much as the rent, employees and inventory cost?  Then you won't have enough to pay back the person you borrowed from.  To build back to the point the lender started from, more savings will be required--which means the lender will have to consume less and save more.

Once again, so it is with the world or national economy.  Bad loans are solved by more saving, not consumption.  Destruction by mother nature requires more saving, not more spending. 

More spending than production leads to lower standards of living.  The solution, once again, is savings, not consumption.

Don't be fooled by those who say the U.S., or China, or Europe, or Japan, or anyone else can create prosperity or growth by borrowing to consume.  Growth comes from savings, not consumption.  And borrowing to consume requires even more savings to get back to break even.

Next time you hear someone prattle on about how we need more consumption to get growth "going" (I don't care if they have a Nobel prize in economics--that just means they should know better!), think about an island in the Pacific and that consuming fish doesn't create shelter or boats.

It's time to go back to our country's roots, it's time to tear down the over-worship of consumption and spending and replace it with a reverence for savings and investment. 

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.