The View From 1776
Thursday, September 12, 2013
Savings vs. Borrowing
The Federal Reserve’s Keynesian economists believe that savings is bad and that borrowing more than you can repay is the route to economic salvation.
Fed chairman Bernanke, just months before the implosion of our financial system in 2007-08, declared that the problem confronting the United States and the world was excessive savings and not enough consumption. What is now blindingly obvious is that the problem was the exact opposite: individuals and governments had gone heavily into debt, far beyond their capacity to service it. The EU, for example, has lurched from crisis to crisis, trying to prop up member nations that had floated their economies on debt greatly in excess of their capacity to produce goods and services of sufficient market value to handle those debts.
The Forbes article linked below should have narrowed its aim to Keynesian and neo-Keynesian economists, who believe that the only route to recovery from an economic recession is going further into debt and using the proceeds to consume even more goods and services. The cause of our current, prolonged recession was the Fed’s Keynesian policy of creating excessive amounts of fiat money that enabled and encouraged financial institutions to over-lend to companies and individuals.
And, in 1930, a severe economic contraction began that economists did not see coming and did not know what to do about after it arrived. The period of economic distress lasted 12 years and was later named “The Great Depression.”
…And, in late 2007, a severe economic contraction began that economists did not see coming and did not know what to do about after it arrived. This period of economic distress has lasted almost six years to date. Let’s call it “The Pretty Good Depression.”
Let’s be blunt. Whatever economics is, it is not a science. Unlike physicists, who can predict an asteroid’s closest approach to earth within a few miles when it is still 100 million miles out in space, economists can’t accurately predict this quarter’s GDP. Indeed, they are still arguing among themselves about what “really” happened 83 years ago…
Avent then goes on to say:
“From the depression of the 1930s, economists learned that money matters, and that a contraction in the money supply can produce a painful downturn. From the inflation of the 1970s, economists learned that inflation is a monetary phenomenon, which can be controlled through the proper application of monetary policy. One has the sense that, although the world’s present disaster is coming—slowly, fitfully—to an end, central bankers are still quite a long way away from understanding how they failed, and how they might do better in the future.”