Americans today live like there’s no tomorrow. You can see this in the data regarding retirement. People behave like they will never retire, and the prophecy is self-fulfilling. Under these conditions, they won’t.
A new survey shows that 57% of households have less than $25,000 in total household savings and investments. And the trend line looks terrible and is getting worse.
Meanwhile, everyone is living longer, but not healthier, meaning that people will be more dependent in their older years than ever before.
The moralists are quick to condemn this as resulting from a deep character problem in all of us. But economists prefer to look more deeply at institutional factors. What could account for such shabby planning on the part of American households?
Look at monetary policy. Where’s the reward for saving? It’s not there. The Fed has nearly abolished the normal rate of return on savings.
More than that, a policy of zero interest encourages living for the day, spending as much as you can, and leveraging up lifestyle. After all, where’s the downside? Zero rates suggest little or no risk to borrowing. They suggest that there is no reward for saving. The signal is all is right with the world, so spend, spend, spend. In other words, this isn’t a character flaw at work. People are merely responding to the signals they get. The Fed, not the human heart, deserves the blame.
I’ve spent a good part of the week doing a close study of Ludwig von Mises’ writing on the business cycle, which Laissez Faire has collected in a handy volume called The Illusion of Wealth, edited by Robert Murphy. What I found here has surprised me. What we get from this theory is not a mechanistic caricature as portrayed by Paul Krugman and others. It’s not as easy as: 1) The Fed expands money, 2) production revs up, 3) price inflation goes nuts, and 4) the system crashes.
Mises’ views are much more subtle and complex than that. The effects of loose money and artificially low interest rates do not always show up in the form of a general increase in prices. It all depends on the response of the banking system and the expectations of consumers. More likely, the price effects will show up in particular sectors like the stock market and wages. This is where the cyclical activity can be observed, says Mises. All the while, such a policy depletes capital and savings, leaving the economy more fragile in dealing with future contingencies.
According to Mises, there are two vehicles for economic progress: “the accumulation of additional capital goods by means of saving” and “improvement in technological methods of production.”
If you look around the world today, you see gobs of technological improvement. In fact, we’ve seen astonishing amounts of it over the last 15 years. This is exactly what Mises’ theory would predict. When the Fed lowers the interest rate, the pace at which new technologies come to market increases. The risk of failure is lower.
The common view is that when scientists and engineers discover stuff, it is quickly shoved out into use and becomes part of our lives. End of story.
This is not how Mises views the situation at all. In his view, there is vastly more technology available than is ever put to use at any moment of time. It’s like it is stored in a huge warehouse. The hand of the market — powered by capital accumulation — reaches into the warehouse and pulls out technology and tries it out in the marketplace to see if it can succeed or if it will fail. The entire process is nicely balanced: New things are supported by savings and capital.
The entire balance is upset when the Fed lowers rates of interest and injects speed into the system. The hand that reaches into the knowledge warehouse works at a much faster pace. We get ever more cool things to use at an ever increasing pace. This innovation is not fake; it really is a source of economic progress.
So what’s the problem? The problem occurs on the other end of the scale, in the realm of saving and capital. Here we see depletion. Consumers leverage up. Businesses expand dramatically. Everything in sight is put to use as soon as possible. There is no rest, no pulling back, no waiting. Everything must happen now, as if there is no tomorrow. This particularly affects the financial industry, which grows larger and larger despite fewer and fewer real resources.
This tendency toward relentless capital depletion, combined with a hyped-up pace of technological development, perfectly describes our economic times. If we look at what has happened to individuals saving since the Fed got in the business of interest-rate manipulation as a full-time gig, we see a steady rate of savings become utterly wild. It is depleted in the boom, and then panic sets in during the bust. Once the crisis settles, private saving plummets again.
This is a direct result of Fed policy that has been driving rates systematically lower over the decades and intervening ever more in the market’s signaling mechanism.
Meanwhile, we are literally addicted to technological progress. We have to have it at increasing rates else we stop growing. The progress is real, but too necessary to sustain prosperity. It’s like a person who goes to the gym and gets stronger and stronger, but must or else he can’t run or walk at all. The economy is not self-sustaining. The credit has to flow and flow to keep underwriting innovation.
And as Mises would predict, what seems like economic progress is not entirely fake but it comes with a rub. Incomes aren’t really increasing, because capital is not being accumulated. Prosperity exists and continues apace, but it has a very weak foundation. It is nothing more than a “castle in the air,” as Mises would say. (In the original German, the word is Luftschloss, meaning a dream that is not realistic.)
Notice that the scenario that Mises maps out here can include such things as the hyperinflation of history and legend, but it need not. Bad money does damage either way. And the damage is long term — not a crisis tomorrow or the next day, but a long-run effect that slowly erodes the foundation of a growing economy.
This is not the usual business cycle story that we hear attributed to the Austrians, but it is the one told by Mises in his most mature writings collected in this wonderful book ,The Illusion of Wealth. The scenario doesn’t make the headlines and doesn’t embolden politics movements, but it is no less real.
People can live in a house a long time without paying attention to the reality that the foundation that holds up the building is cracked and rotting. What’s the way out in this case? We need sound money with market-based interest rates. It’s not we who are corrupt, but the policymakers behind the Fed who are choosing short-term gains over long-term sustainability.
Original article posted on Laissez-Faire Today
I'm executive editor of Laissez Faire Books and the proprietor of the Laissez Faire Club. I'm the author of two books in the field of economics and one on early music. My main professional work between 1985 and 2011 was with the MIses Institute but I've also worked with the Acton Institute and Mackinac Institute, as well as written thousands of published articles. My personal twitter account @jeffreyatucker FB is @jeffrey.albert.tucker Plain old email is firstname.lastname@example.org
I went to the Amazon Ludwig page, and there is no mention of the book “The Illusion of Wealth” Are you sure that’s the title?
Pingback: mp3 download
Pingback: bolig Tyrkia
Pingback: circa Il Prezzo E’ Sbagliato – E Anche Krugman si Sbaglia | italien post
Pingback: free poker online
Pingback: Product Launch Formula 4.0
Pingback: Silver ira rollover
Pingback: calories to lose weight
Pingback: Perth Locksmiths
Pingback: garcinia cambogia review
Pingback: buy vimax
Pingback: where to buy no no hair removal in uk
Pingback: performance marketing
Pingback: proxy server
Pingback: click the up coming webpage
Pingback: click through the following website
Pingback: Going On this site
Pingback: just click the up coming website
Pingback: linked resource site
Pingback: please click
Pingback: simply click the up coming internet site
Pingback: please click the following web site
Pingback: Read More In this article
Pingback: Recommended Looking at
Pingback: simply click the next website page
Pingback: simply click the following website page
Pingback: visit the next document
Pingback: click the following webpage
Pingback: click the following web page
Pingback: click through the following document
Pingback: click through the up coming internet page
Pingback: please click the next page
Pingback: Discover More
Pingback: Read the Full Guide
Pingback: Recommended Webpage
Pingback: just click the up coming page
Pingback: relevant webpage
Pingback: Suggested Browsing
Pingback: just click the next article
Pingback: This Internet site
Pingback: visit the following webpage
Pingback: linked internet page
Pingback: mouse click the up coming post
Pingback: simply click the up coming website
Pingback: More Support
Pingback: relevant website
Pingback: horse racing systems
Pingback: click the next post
Pingback: Recommended Internet page
Pingback: simply click the following webpage
Pingback: mouse click the next internet page
Pingback: mouse click the next web page
Pingback: please click the up coming website page
Pingback: please click the next webpage
Pingback: Click On this site
Pingback: Read the Full Document
Pingback: Recommended Online site
Pingback: visit the next website page
Pingback: Suggested Reading
Pingback: click through the up coming article
Pingback: Read the Full Report
Pingback: Full Content
Pingback: Learn Alot more Here
Pingback: main page
Pingback: visit the next website
Pingback: visit the following page
Pingback: visit the next web site
Pingback: mouse click the up coming website page
Pingback: Read the Full Piece of writing
Pingback: Read This
Pingback: simply click the up coming webpage
Pingback: Suggested Studying
Pingback: simply click the following internet page
Pingback: visit the following web page
Pingback: visit the next web page
Pingback: Click This Link
Pingback: Click Here
Pingback: click through the up coming web site
Pingback: linked web page
Pingback: More Information and facts
Pingback: more helpful hints
Pingback: similar web-site
Pingback: simply click the following post
Pingback: Learn Even more Here
Pingback: simply click the following web site
Pingback: please click the up coming post
Pingback: Read Much more
Pingback: Read A great deal more
Pingback: relevant web site
Pingback: Recommended Web site
Pingback: related resource site
Pingback: click through the following web page
Pingback: click through the following post
Pingback: Highly recommended Website
Pingback: just click the up coming document
Pingback: Suggested Site
Pingback: this website
Pingback: visit the up coming internet site
Pingback: mouse click the up coming document
Pingback: please click the next internet page
Pingback: Read Full Article
Pingback: Read A lot more
Pingback: Recommended Internet site
Pingback: relevant resource site
Pingback: simply click the next website
Pingback: Suggested Web site
Pingback: visit the up coming post
Pingback: Full Post
Pingback: Go Here
Pingback: just click the up coming article
Pingback: source for this article
Pingback: This Site
Pingback: Read This method
Pingback: please click the next website
Pingback: similar web page
Pingback: Suggested Looking at
Pingback: visit the following website page
Pingback: click the following website
Pingback: click the up coming internet site
Pingback: Full Piece of writing
Pingback: click for source
Pingback: visit the next site
Pingback: just click the next post
Pingback: More Info
Pingback: simply click the up coming post
Pingback: simply click the up coming site
Pingback: similar resource site
Pingback: click the following page
Pingback: More inspiring ideas
Pingback: click the next page
Pingback: click through the following web site
Pingback: stay with me
Pingback: Full Guide
Pingback: linked web site
Pingback: just click the following webpage
Pingback: More Signup bonuses
Pingback: visit the following site
Pingback: click the following article
Pingback: click through the next website page
Pingback: helpful hints
Pingback: Highly recommended Web-site
Pingback: relevant web page
Pingback: linked website
Pingback: Suggested Resource site
Pingback: visit the next page
Pingback: mouse click the next document
Pingback: Suggested Internet site
Pingback: click through the up coming web page
Pingback: Read Alot more
Pingback: Going In this article
Pingback: click through the next document
Pingback: Suggested Website
The US Social Security program is complete mess. The funds needed to pay these benefits are quickly drying up, and agreeable solutions are in short supply. But all is not lost... There actually IS a viable way to "save" Social Security. But as Dave Gonigam explains, you're probably not going to like it. Read on...
This summer, the worst Ebola outbreak ever recorded hit sub-Saharan Africa. But the greatest danger, as Stephen Petranek explains, is that the virus will have a chance to mutate into a form that spreads more easily. And if that happens, there will be far reaching consequences - from both a health and an investment side. Read on...
Everyone in the world has a unique talent or skill that someone else might find useful. Whether it's editing video, speaking Spanish or even eating paper, chances are there is someone out there willing to pay for what you have to offer. Today, Chris Campbell shows you one way to find those consumers and how to make your skill work for you...
For the last few years, gun enthusiasts have been concerned that the Feds would find a way to block their access to firearms. Now those fears appear to be subsiding... and so do gun sales. Greg Guenthner explains how to navigate this market in the coming months and years. Read on...
The gold mining sector is one of the most difficult areas of the market to navigate successfully. But there is money to be made here. Henry Bonner sits down with one of the giants of this industry and picks his brain about how to find winners in this market and the four things every great investment has in common. Read on...