A simple economic truth that's staring Americans in the face

Stop saving

Obama has printed greenbacks by the truckload yet prices in the supermarkets have mostly not risen much.  That's not supposed to happen.  More money chasing the same amount of goods and services is supposed to devalue the money and send prices rocketing.  So what gives?  That's a puzzle many economists have addressed.  Lags in the system can by now be fairly convincingly dismissed so there is only one possible explanation.  People are saving (mainly by paying off debt) at roughly the same rate as Obama is printing money.

So what's going on is not only driven by Keynesian thinking but it is actually working in a Keynsian sort of a way.  Public demand is replacing private demand.  So as long as Americans lack confidence in the future, Obama can keep printing money and thus seize huge amounts of private output for spending by the government.  And it's hard to see him doing anything to boost confidence in the next 4 years.  So there is no need for him to cut government spending.

But countries need investment spending to remain prosperous and it is precisely investment spending that is not happening.  People are mostly not building new homes and businesses are mostly not building new factories, to put it at its simplest.  A large part  of the workforce which normally provides investment goods (builders etc) is either not working or has been sucked into unproductive government employment.

But without investment spending the country will not only fail to grow but will even go backwards.  Maintenance is a major form of investment spending and without maintenance assets will deteriorate and everyone will be poorer for it.

But, whatever the detail, the crash in private investment is causing a crash in jobs and more and more people are becoming welfare-dependent.  America is becoming steadily poorer.  And Obama's job numbers are the sort of thing that the guy had in mind who wrote the book "How to lie with statistics".  Even many  Mexicans are going home for lack of work.  As a percentage of the population, the number of people working has not been so low since the Depression.

Is there a way out?  Hopefully.  Countries can continue to get poorer for many years  -- as Britain has.  And the solid bloc of minorities that elected Obama may continue to elect equally destructive Democrats for many years to come.  But I am guessing here that Americans have got more spunk than that.  If the next Democrat presidential candidate is white, even some blacks may get tired of no jobs and vote GOP.

And just the election of a GOP president would probably inspire confidence in the people who make investment decisions. And if he immediately rolled back the previous 8 years of EPA regulations,  America would be on a roll.  The demand for investment goods and services would roar ahead and all that newly released investment money chasing a fairly fixed supply of goods and services will bid up prices sharply.  Everything will cost a lot more and a greenback will buy a lot less.  Roaring inflation will have arrived.

A drastic cut in government spending at the same time could in theory prevent much of the inflation but that ain't gonna happen.

So people's savings will be virtually wiped out, which will be keenly felt by many, particularly older Americans who will see a life's hard work and savings go down the drain.

So what should Americans do right now?  Roughly the opposite of what they are now mostly doing:  Stop saving and stop paying off debt.  Maybe even borrow money to buy another house for letting  out.  Money in the bank won't do you much good in the future but owning real assets will.  But don't buy gold.  The price of gold is inflated at the moment by uncertainty.  Once confidence returns, the demand for gold will drop.

And I know what I am talking about.  I have "been there and done that".  In the early '70s I bought some condos using mainly borrowed money.  Then along came a Leftist government, led by the economically illiterate E.G. Whilam, that went on a spending spree and inflated the currency to do it.  So when my loans came up for renewal, the prices of real estate had roughly doubled and by selling one condo I could pay off my debts on all the rest.  I thus owe my present economically comfortable circumstances to Leftist folly.  You too can do that.

Shares in blue chip companies are another possibility but are risky unless you know what you are doing.

The destruction of savings will of course create great outrage and who will get the blame for that?  Unless they have great PR, it will be the next GOP administration.  They will be blamed for excesses created by Obama.  The GOP administration might even try price-controls to save its skin.  Nixon did.  But that will just create more chaos.

So a return to Donk destruction can also be foreseen, sadly for America.  The long-term future for America is not bright now that a huge slice of the electorate is as thick as a brick.  Restricting voting to those who pay income taxes would help but is most unlikely to happen.


Posted by John J. Ray (M.A.; Ph.D.).