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The Mother-Myth of Modern Economics |
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The so-called evils of "excess savings"... Saving is spending… 🧨 Are you aware of the looming Jan. 28th Ultimatum? Well, that's the one date you MUST have circled on your calendar. Why is Jan. 28 so important to you? Get the crucial details here.
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Dear Reader, |
Once again the economics profession is yelling about "excess savings." |
In the case at bar, China's excess savings. |
A certain Eswar Prasad professes trade policy at Cornell University. He is likewise a senior fellow at the Brookings Institution. From whom: |
Domestic consumption has not kept pace with rising output because Chinese households are reluctant to spend freely. Facing uncertain employment prospects and the plunging value of their real estate, they have been stashing a lot of their earnings in savings. |
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Just so. Yet what is a fellow confronting uncertain employment prospects and declining real estate values to do with his money? |
Take to the gaming casinos? Take an exotic vacation? Go spreeing through the shopping malls? |
Keynesian economists of Mr. Prasad's kidney might prefer him to. Yet the average man is a sensible man. He lives his life divorced from abstract theory. |
And so he saves his money against the rainy day. Thus to the mainstream economist, he is a sort of anti-social miser concerned only with himself. |
Why Is Inflation Better Than Deflation? |
Continues the Ivy League professor of trade policy: |
When an economy produces more than it consumes, something has to give. One possibility is that prices fall, which tends to encourage consumers to buy more. But when households anticipate continually dropping prices, they might postpone consumption rather than increase it. China has been facing such deflationary pressures. |
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Yet let us — in the spacious spirit of inquiry — invert the passage: |
When an economy produces less than it consumes, something has to give. One possibility is that prices rise, which tends to encourage consumers to buy less. But when households anticipate continually rising prices, they might increase consumption rather than postpone it. China has been facing such inflationary pressures. |
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The actual passage invokes the evils, so-called, of deflation. The modified passage invokes the evils of inflation. |
Does the deflation scenario represent a greater menace than the inflation scenario? |
It does not. The deflation scenario is in fact far brighter than the inflation scenario. |
That is because the deflation scenario has a vast pool of savings as its backdrop. Those savings can sustain an economy. |
The inflation scenario, meantime, lacks the beneficial backdrop. It has no savings behind it, no savings to see it through. |
We must concede that savings form the granite bedrock of a sound economy. |
An economy erected upon this granite is a rugged economy, a durable economy. |
The consumption-based economy — the savings-depleted economy — is not. |
The Virtues of Savings |
Yet the author moans about the evils of savings-induced deflation. It disturbs him more than inflation disturbs him, evidently at least. |
Why? The answer is because the modern economics profession has rewritten the rulebook. |
"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. |
Some individual savings may be indulged. concedes the economist of Keynesian leanings. |
Yet if the entire nation tied down its money in savings? |
They sob that all species of economic calamity would ensue. |
If all saved a savage cycle would feed and feed upon itself, they insist… until the economy is devoured to the final crumbs. |
Consumption would dwindle to near-nonexistence. |
The great gears of industry would grind idle. |
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. Individual prudence represents collective ruin. |
It is perhaps the mother myth of economists in the Keynesian line. |
Yet no such paradox exists. |
Say's Law Has Never Been Overturned |
The anti-savers and consumption-firsters have forgotten their 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. |
Yet 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. |
Saving Is Spending |
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 merely 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. |
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. |
Which society closer resembles that society — China's — or the United States'? |
Brian Maher |
for Freedom Financial News |
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