An alternative to popular faith

Stephen Gandel is a senior writer at TIME, where he covers real estate, economics and Wall Street. He blogs at The Curious Capitalist. In one post at What’s Worse: Stingy Banks or Thrifty Consumers? he said, “Now it is true that for the long term health of the US economy we all need to save more and borrow less.”

Though this passes for popular faith in economics, I see no evidence that personal saving benefits the economy.

saving vs GDP

As you can see there is no relationship between saving and GDP growth. Worse, no one really knows what “saving” is. Here’s an excerpt from Free Money:

Decide which activities you consider “saving.” Develop your own rules about what is “saving.”
Do you “save” when you:
1. Bury your currency in a tin can in your back yard?
2. Deposit your money in your bank savings account or in your money market account?
3. Purchase Treasury bills or bank CDs?
4. Purchase guaranteed-interest, whole life insurance?
5. Purchase stocks and bonds?
6. Purchase real estate?
7. Purchase a business?
8. Purchase your primary residence?
9. Purchase a secondary residence?
10. Purchase a car for your business use?
11. Purchase a car for your personal use?
12. Purchase a television set?
13. Purchase food and clothing?

Study this list. The more you think about it, the more doubts you probably will have about what is saving, what is investing and what is spending — and what part of investing really should be considered saving.

So, between the lack of historical correlation between saving and GDP growth, and the arbitrary and varying definitions of saving, the popular faith that saving benefits the economy seems questionable.

Also, keep in mind the 2nd part of his statement, ” . . . we all need to . . . borrow less.” Since borrowing creates money, borrowing less creates less money, which certainly is not stimulative.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com