Save Haven

The news slows
People forget
The shares crash, hopes are dashed
People forget
Forget they're hiding
--The Who

Newsweek recently ran a cover story entitled "Stop Saving Now." The article draws on Keynesian 'Paradox of Thrift' theory, which postulates that during tough times, if individuals become risk averse and save, then the overall economy will decline and everyone will be worse off. The Keynes remedy is government sponsored intervention to motivate more risk taking and spending.

This theory is misguided in that it assumes that economic progress depends on consumption and spending. We've heard political leaders claim that 'credit is the lifeblood of our economy' and the like.

No. The lifeblood of an economy is capital formation. Capital is invested in processes that improve productivity and raise standard of living over time. Capital formation requires abstaining from the consumption of some resources in the present, and putting them aside for the future (read: saving).

During the past few years (decades), we've been consuming more resources than we've earned in income. By consuming more than we've earned, we've not only squandered capital that should have been invested in our future, but we've borrowed and consumed resources from others. Living large in the present has compromised our future: we're both under-invested plus we owe others. Consequentially, future standard of living is almost certain to decline.

Individuals are starting to figure this out, and they are correctly changing their behavior towards paying down debt and saving. While this results in a lower standard of living in the near term, it will help rebuild capital stock over time.

By promoting another round of borrow-and-spend, bureaucrats are pointing us towards a state of irreversible squalor. Let's hope that individuals have the fortitude to overthrow this movement.