No Savings, No Investing

"It's easy to get in. It's hard to get out."
--Gordon Gekko (Money Never Sleeps)

Following up on yesterday's post, how does one know that today's government programs constitute spending rather than investing?

An income of economic resources, earned from productive activity, can be used in one of two general ways. It can be consumed, thereby facilitating today's standard of living. Or it can be saved, thereby facilitating tomorrow's standard of living.

From those resources that are saved, some fraction may be put at risk toward improving productivity in the future. That fraction put at risk is called investing.

More consumption facilitates higher standard of living today. To elevate standard of living beyond the level obtained by consuming 100% of income (let's call this ultra high consumption), economic resources must be borrowed from someone else.

Borrowing resources for consumption today burdens future standard of living. To pay back the lender and still maintain today's living standards, future productivity must increase to a level that enables ultra high consumption plus repaying debt. This is very difficult to do, and this difficulty increases in direct relationship to the quantity of economic resources borrowed.

When debt is high, it is likely that future consumption will have to be curtailed while income is diverted toward paying back lenders. Moreover, it is likely that there will be little residual income left over for savings--and by extension investment.

For years, the United States has been indulging in ultra high consumption. We have borrowed huge amounts of economic resources to treat ourselves to a living standard far beyond what is possible from consuming our income alone. Stated differently, we have been consuming our income, plus some of the incomes of others.

Now, our savings rate is essentially negative as we divert ever higher portions of our income toward debt service. Our problem, however, is that we don't want to give up ultra high consumption. So we keep borrowing from those creditors willing to lend.

This cycle can only persist until creditors refuse to lend.

While we do not know when this state of affairs will end, we do know two things. It will end. And until it ends, our capacity for investment is tiny, since we have no real savings to invest with.

On its best day, government's capacity for allocating savings toward prudent investment alternatives is miniscule. Government is more apt to deploy savings toward programs that consume those resources rather than invest them. This is called capital consumption.

Our current field position suggests that most capital has long been consumed.