Indispensable Economics My Money Lies over the Ocean…

Aug 14, 2009

In our last entry we discussed the necessity of savings for economic growth. It is savings which buys capital goods so that we can have consumer goods in the future. It was also pointed out that there needed to be enough savings to repair and replace current capital equipment just to consume at current levels, and that in order to grow economically, we must save more than that.

Having said that, it was shown that the United States does not save. We have a negative savings rate. But that does not seem to affect us very much. Sure, there is an economic downturn, but even before this recent recession we did not save, yet our lifestyles did not seem to suffer. Why is that if savings is so important?

The answer is that the savings had to some from somewhere. And if it did not come from the United States’ citizens, where did it come from?

We live in an international economy. Some countries actually save, like China. China, and nations like her, has more savings than it needs, so the people with savings look for places to put their money. Since China has a lot of savings floating around, its interest rates are naturally low (unlike ours, which are made artificially low by the money creation power of the Federal Reserve). If a person in China with savings is looking for a place to invest to make a decent return, he looks outside China to get a better return. One place is the United States. So, for example, Luckey’s Economics Textbook factory needs money to expand. But there is no savings in the United States—Hello, China! So the Chinese investor gets a higher return from investing in Luckey’s Textbook factory than he would get investing in something in his own country. So I borrow the money from him, and expand my business. But here’s the catch. I now owe a guy in China, say, two million bucks. And it’s not only me. Everyone who needs money for business purposes in the Unites States, and cannot find someone’s savings to borrow, must go to another country with savings to get a loan. So other countries own our stocks, bonds, and other securities.

It is the same with government debt. Our government has so saturated the bond market with its bonds, trying to live with a gigantic deficit, it has to go overseas to sell government bonds. In addition, the government and private corporations must increasingly offer higher and higher interest rates to attract foreign investors to take our bonds. US debt held by foreign countries is now $3.4 trillion. Interest on the Federal government debt alone is currently $261.6 billion. So, in other words, the Federal government is paying $261.6 billion dollars per year of your tax money just to pay the interest on the government bonds it has floated because we all want government services and do not want to pay the full price for them, and the companies in the US are paying a fortune to foreign citizens because the rest of us cannot get ourselves to save.

If you think that this is merely an economic problem, you’d better think again. The inability to live within one’s means is symptomatic of a character flaw whereby we think that we are entitled to more than we produce. Your salary is based directly on what you produce. When you spend more than you make, you are saying that you are entitled to what your production cannot buy. Sometimes this is necessary; for example, you can invest in an education, because having that education will pay off in higher wages, i.e., higher productivity, and you can pay the debt off and live at a higher standard. Also, many people spend money helping the poor or their young, recently married children who have special problems. But many of us are not that way. I did a study of the bankruptcy courts in Virginia years ago, and you would be surprised how many uneducated, marginally employed couples bought a big pickup truck that they could not afford, and then declared bankruptcy just to keep the truck. This is pathetic.

Now, you go and examine your conscience. If you are not saving merely because you want stuff, make a new budget (if you ever had one), put savings in it, and do us all a favor and live by it.