Savers are bad and Savers are good
by drinker on Jan.08, 2009, under Economics, Random Thoughts for the Day
At first I thought this article about savers had to be a joke. But alas it is real.
Someone should really take this person’s keyboard away before they hurt someone. I guess he/she works from home. After all how do you get to work when you have cart in front of the horse.
For those of you that think this is a good idea, remember that banks lend out money that people save. Basically the interest a person earns on the money they keep in the bank account is their share of the interest the bank made in loaning it out. If there are no savers, there is no money to lend out. We have been playing this juggling act of using leveraged assets to buy more assets and then leverage the total again, for too long.
There is nothing wrong with leverage itself. It actually enables our economy to function. It allows most of the successful economies to function. Leverage allows people to take a risk and be rewarded. But what we have going on now is that the leverage was out of control and that everyone was so leveraged the whole system threatens to fail.
The situation we have is like an alcoholic who functions by taking a shot of whiskey in the morning, we are making our situation worse. We have to go through the hang over from over consumption.
The government is going to have to spend money to get things moving but these things have to be done in such a way that the money that is spent is spent on things to enable more private commerce. I hope the government spends money on new roads, bridges, power distribution, and other infrastructure work. But we all know what is going to happen. Think Boston Big Dig but with more money.
As for the people saving their money and not spending it, well that is just the way things happen. People afraid that they will lose their jobs try to save money. The problem is not the saving people. Provided they are not saving their money by putting it under their mattress, which is the only way money is truly lost to non-circulation. The problem is that banks are not lending money at all. Unfortunately they are not lending to worthwhile companies either. Perhaps if enough people put enough money in the bank it will be able to de-leverage it self out of bad situation.
What we need is moderation. Some spending, not like we have seen, but we also need savers. Some people have to get burned and some have to be rewarded. After-all it is those people who saved their money are the same ones who we depend on to get a loan when we need it.
