OK, folks, you’d better sit down and make sure your blood pressure is at a reasonable level before continuing. Here is Tom Nugent “debunking” some economic fallacies, with my comments interspersed:
“5. What This Country Needs Is Higher Savings.
“I am sure you have heard more than one economist or politician bemoan low savings rates in the U.S. as if higher savings rates would somehow help the economy. I guess these guys think that increased savings means more capital for business investment.”
- Can you imagine, that they’d think something like that!
“How silly is that!”
- Not at all silly?
“In aggregate, one person’s savings is another person’s income. If I decide to spend less and save more, then someone else won’t have that income.”
- That’s right, Tom. And another someone else will have that income. That’s because we generally don’t bury our savings in tin cans in the backyard. We put it in a bank, and they lend it to people who SPEND IT!
“The economy slows as a result and there is less need for capital investment.”
- 1) Well, no, it won’t, since the money IS spent; and
2) Until all human wants are satisfied, there is no limit to the “need” for capital investment.
“And banks can lend money unconstrained by the size of their checkbooks, so if businesses want to borrow to increase capital expenditures, there doesn’t have to be a higher level of savings to accomplish that end.”
- So why don’t we just print money until we have an infinite supply of goods available to us? It’s true that business can spend more money on capital goods if banks create more money. What they can’t do is acquire any more capital goods than previously with that new money. They can only acquire the amount of capital goods that have been produced! It is production, financed by savings, that creates more capital goods, not little pieces of paper.
“However, the most important aspect of savings is deficit spending by the government. When the government runs a budget deficit it creates private sector savings.”
- It’s true that for the government to borrow, someone must be lending. But that lending can come from two sources: increased net savings or capital consumption. Nugent has given no reason why it should always be the former. I think Ted Nugent is probably sounder on economics than Tom.
