Tuesday, March 6, 2012

Ben Bernanke is anti-savings and anti-growth

Andy Laperriere wrote an interesting article a few days ago in the WSJ about the problem with having Federal Reserve interest rates below inflation rates.
The article does a good (but not great) job not explaining the problems with 'cheap money.'

My favorite line from the article is the following:  "Prosperity does not come from spending; it comes from work, saving and investment."

My least favorite line from the article is: "But saving is deferred consumption—people save to earn a return so that they may consume more in the future (say, for retirement or a major purchase)."

The problem is that if we call 'saving'  by the name 'deferred consumption,'  then we are still living in a fantasy world in which 'consumption' drives the economy.
Work (and the fuels/powerplants that help generate mechanical and electrical work) drives the economy. The point of investing and the point of saving is to increase the amount of work that we can generate in the future.
The point of consumption (such as a buying a nicer house) is to show off to others that you've got want it takes to thrive and to grow. It's like the peacock's feathers. They have their purpose, but the peacock's feather's don't drive the 'peacock' economy. What drives the natural economy of peacock is the seeds, grains, nuts and insects that they eat.
For peacocks, there needs to be balance between growing muscles to help them forage and growing feathers to help them mate.

Remember that when you invest money, that money still goes to a business. The difference between investing and consumption is that, when you invest, on average you see a positive return on that investment. And from that return on investment, you can spend some of the money on luxuries and re-invest the rest of the money.
This is the only long-term strategy for growing wealth (i.e. work).

The problem is that people like Ben Bernanke is making it tough for people to save and to invest their money. He's trying to get us to consume luxuries, and hence to waste our money. It's as if his goal is a 'steady-state' economy. It's as if he doesn't want real growth of the economy...just the feeling of growing because of inflation.

For example, he gave a speech last week saying, [paraphrase] "Don't worry about people trying to save because they invest in companies...so it doesn't matter if the Federal Reserve keeps interest rates low."

This is a misleading argument because low Federal Reserve interest rates are keeping down company bonds, and hence a company can go into the bond market rather than the stock market for new investment.

In the end, low Federal Reserve interest rates cause low growth. There's no way around it. If we want growth, we need saving and investment, and this will only come when the Federal Reserve raises interest rates.

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