Conventional Wisdom

By Mr Practical  JAN 05, 2009 11:00 AM

Savings must match debt. Period.


Conventional wisdom holds that the way out of the “recession” is to spend our way out of it. A trillion dollar stimulus package is being touted by the pundits as the right way to "shock the economy" (I suppose the economy is just in a coma, and merely needs awakening) into growth again.

Interest rates on savings at banks are 0.15%, or basically zero. When you ask a banker why they're so low, he'll tell you it's because our lending rates are so low. Lending rates are so low because the Federal Reserve has made them that way. The Federal Reserve wants no incentive to save money.

This isn't a normal “recession”; this is the end of a massive credit bubble rooted in the culmination of many years of faulty monetary policy in an attempt to avoid small, corrective recessions. Conventional wisdom has been dead wrong about what's been happening for the last 20 years, let alone the last 20 weeks.

It's sadly predictable that economists and government officials who clearly don't understand the root of the problem (too much debt) are promoting more debt as the solution. We'll be adding another $2 trillion to the national debt this year, to be borrowed from our children. The bigger the national debt, the bigger the government will be. The bigger government is, the more authoritative it will be.

Conventional wisdom is putting us on a path to total destruction of our currency. For those who don’t understand that, understand this: Economically, a currency holds a nation together. Without currency, the economy and perhaps society are at great risk of breaking down.

Creating jobs for the masses does nothing but put some cash in people’s pockets - cash that is worth less and less as the government borrows more and more. What jobs created by the government do in reality is promote inefficiency and waste. The federal government is completely out of control at this point: Bureaucrats are simply not qualified to make these decisions, even though they insist on making them. Therefore, any real solution requires decentralization and overall reduction of governmental power. The real problem is that we have no savings pool to support sound lending, due to years of misguided Federal Reserve policy. In its desperation to “fix” the problem, the Fed is now creating more imbalances than it's reducing. The banking system is broken from years of cumulative abuse. All the Fed is doing now is changing private debt into public debt by accepting the risks itself. But, even here, it's not really accepting risk for any losses it sustains in the process, as they'll be made up by directly printing money.

A balanced economy needs a savings pool commensurate with its debt pool...period. Any solution that deviates from that is going to make things worse, in the long run, for our children. It took years to deplete it, and it will take years of saving (in conjunction with debt reduction) to balance it.

Notice that the government’s solution directly opposes this: They want zero interest rates so that people can borrow even more “money,” save nothing, and spend everything. This is ludicrous on its face.

We as a people must return to logic and sound thinking. We must immediately do 2 things: Start encouraging people to save their money (zero interest rates don't do that), and promote productivity (the government cannot do that; only the private market can).

We need to allow interest rates to rise so people can save. We need to cut government spending by 95%. We need to eventually cut taxes by 95%. We need to decentralize government’s power. In the short run this will hurt - but in the long run our children and this country will be much, much better off.

Unfortunately, we will never see if this works. We know there will be a large “stimulus” plan from the government. I can only urge the new President to use the bulk of it in the best way possible: for education. If we're going to borrow against our children’s standard of living, we should use it to arm them with the best education possible.

Regardless, it seems we'll see what it's like to have our currency completely destroyed by the pompous few we have given power to.

Risk is getting higher.
No positions in stocks mentioned.

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