January 13, 2015

Don’t Let the Anti-Savers Tell You to Spend

By In Blogs, C.Jay Engel
I was reading the financial news this morning, particularly updates on the plunging price of oil, and noticed two commenters at each other’s throats over the proper use of money not spent on gas at the pump. The first expressed a round of praise over the fact that he could now take some of the money every month that he was once spending on his commute to work, and stick it into a savings jar.  The other, likely a dedicated Krugmanite, lambasted the first for not contributing his share to “economic consumption.”  That is to say, the second individual was frustrated at the fact that the lower prices were to spur a small bit of savings and made it very clear that the moral thing to do with the money was not to save it, but rather, to go out and spend it on other things.
In order to sustain the economy, opined the second individual, one must spend as much as he can and keep the money flowing throughout the economy.  It was presumably an act of selfishness that a single person would decide to save rather than spend.  Sure, it might be better to the saver himself, but the cost, according to the fallacious argumentation, was that the economy as a whole would not grow.

This little disagreement represents the so-called “paradox of thrift,” popularized by one of the most important economists in the 20th century, John Maynard Keynes, from whom we get the economic doctrines of Keynesianism.  There are other places around the internet where one can get a full refutation of these pro-spending assumptions; my own point is that it is shocking the level to which modern economic fallacies have created a hostility to savings. One man decides to take advantage of the changing economic conditions around him and put away the money that he doesn’t presently need, and another man is up in arms at the audacity of financial stewardship!  Not to sound curmudgeonly, but when I was a kid the first principle of being wise financially was to put some of your money away for a time when it is needed.  A saver grows wealthy while a spender appears so.

Perhaps this is simply reflective on contemporary society’s hatred of wealth in general. This is the attitude behind Piketty’s outrage over “inequality.”  The idea that some in society, having made better decisions with the scarce resources that they have control over, will experience an outcome of greater reward is considered “controversial” and “unfair.”  At any rate, I praise the man who saves what is not necessary to immediately spend.

As a final and separate note, I should mention the fact that the current oil plunge is not simply a result of an increase in supply or decrease in demand or fall in the costs of production or any of the other common causes of the general fall of prices under normal free market conditions. Unfortunately, this collapse is sourced in the monetary manipulations of the Federal Reserve.  This is a bust that follows a boom.  Which means that, while a breath of fresh air for the consumer, is a reflection on a great amount of wealth being eliminated from investors and capitalists.  Like the housing boom and bust, the current fall of oil is revealing the great lengths to which the Federal Reserve and its Zero Interest Rate Policy misled investors and led to a grand misallocation of resources.  Which means that it is a sign of economic pain to come.  The good news, I suppose, is that every economic recovery must be preceded by the sloughing off of bad investments.  An economic recovery can only come after a collapse.  The bad news however, is that there are far more serious bubbles throughout the Western economy (such as the bond markets).  The even worse news is that the Fed is willing to act at any time to prop up prices and prevent economic pain.  Which in other words means that the Fed is more than willing to prevent the recovery that an economic bust precedes.  Beware Federal Reserve attempts to avoid the pain.

Written by C.Jay Engel

Editor and creator of The Reformed Libertarian. Living in Northern California with his wife, he writes on everything from politics to theology and from culture to economic theory. You can send an email to reformedlibertarian@gmail.com