Savings: The New UnAmerican Way
America is the J. Wellington Wimpy of nations, as its government and its people will gladly pay its creditors on some elusive Tuesday in the future for everything it wants today. An economy based purely on consumption cannot stand. An overemphasis on consumption eventually eats up nations like hypocrisy and racism, ironically, ate up Paula Deen. History is replete with examples of empires falling, in part, because of the financial instability of their debt.
- One of the numerous reasons Ancient Rome fell in the late fourth century was because of perpetual overspending and over-taxation by its government. The final nail was put in its coffin when Rome experienced a severe drop in its labor force. Does this sound familiar?
- Until 1850, the Ottoman Empire was completely debt free. As the 19th century progressed, the Ottomans knew it could not meet its needs simply through taxation and, therefore, it started dabbling on the gateway drug of debt by issuing bonds that were eventually purchased by Europeans investors. Over time, its debt burden created sizeable deficits that only exploded because of their role in WWI. While the Ottoman Empire had more problems than The Baldwin Brothers, the inability to manage the debt it acquired up to and including WWI was part of the reason for its fall.
- While Russian Oligarchs yearn for the days of yore, the Union of Soviet Socialist Republics (USSR) officially dissolved on December 26, 1991 in part because of a stagnant economy with low wage workers and a government that spent over 35 percent of its Gross Domestic Product (GDP) fighting just The Cold War alone.
Is America Next to Fall?
While these empires were plagued with numerous problems that precipitated their falls, they demonstrate the weakening of a former superpower on the world stage in part because of fiscal instability. America should take heed.
In 2000, the U.S. national debt was $5.6 trillion. In 2008, the U.S. national debt was $10 trillion. Today it stands at $17.4 trillion. Since the Presidency of the honorable Richard Nixon, the U.S. national debt as a percentage of GDP has virtually increased non-stop and is now close to WWII levels.
While the public sector has shown it to be as responsible with the nation’s money as Bernie Madoff, the private sector is not doing better. The 7th Annual Savings Survey released last month found that only 68 percent of Americans are spending less than they earn and saving the difference, while only 64 percent have emergency funds to help with unexpected expenses.
Also Read: 10 Simple Steps to Investing
The Wall Street Journal, also, reported on a separate survey conducted by the U.S. Department of Commerce that shows the personal savings rate was only 3.9 percent in December 2013. As we shared Monday, the average retirement savings rate is 6.4 percent, even though most Americans believe it should be 10 percent.
Because It Does Not Rain Pennies from Heaven
Why is America not saving as Ben Franklin advised? It is because we have so enthusiastically embraced John Maynard Keynes’ theories and instituted Keynesian policies that penalize saving and practically force consumption. This embrace has created our lower interest rate environment that makes saving as exciting as reading about Gwyneth Paltrow’s “conscious uncoupling”.
When was the last time you heard about a bank offering a great interest rate? 2008 was the last time an investor could get more than 2 percent on a savings account. The premier rates on savings accounts today range from 0.75 percent to 0.95 percent. That means, even with the best rate, an saver would earn $9.50 in one year by putting $1,000 in a savings account. There is no incentive to do that unless your dream vacation is to take a loved one to Starbucks one afternoon a year. The low interest rate environment that is supposed to spur spending, both personal and corporate, hurts younger investors and retirees most.
Children and younger people just starting to earn money must put their money somewhere, as we all do, but often do not qualify for checking and brokerage accounts because of low balances. Up until several years ago, most started their financial lives with savings account. Over time they would mature to a checking account. Eventually, for many, this led to an investing and individual retirement accounts. Children and younger people are not experiencing the wonders of savings and the magic of the time value of money and compounding interest.
Retirees and those preparing to retire who typically adopt a more conservative portfolio allocation with investments that range from savings accounts to certificates of deposits to bonds are being forced to invest more aggressively than they otherwise would in order to beat the rate of inflation and maintain a standard of living that does not involve dinners at McDonalds and sleeping at the local YMCA.
Colleges Are Crippling Savings
Another example of America’s anti-savings policy is the tax on college savings. In addition to college tuition soaring as high as a Richard Branson space plane, colleges have increasingly discouraged saving for college and incentivized consumption.
Through the federal government’s Free Application for Federal Student Aid (FAFSA) form, colleges collect detailed financial information on students and their parents to determine the tuition each student pays. All things being equal, students with no savings are charged less tuition than students with savings. Additionally, students who do not have savings are forced to borrow through the federally subsidized student loan program.
A Bi-Partisan Effort
The Democrat and Republican parties are as indistinguishable as the Olsen Twins. Different words come out of their mouths, but their loyalties and policies are identical. Democrats have been called “big spending liberals” for years because of their public embrace of Keynes’ theories, but Republicans have not been the supply-side-economic party since Ronald Reagan.
It was Republican President George W. Bush who issued rebate checks in both 2001 and 2008. Bush told Americans, “I encourage you to all go shopping more” in order to grow the economy. These are the words of someone who supports the consumption economy of Keynes and not a production economy. It is on par with Newsweek’s pronouncement for American’s to stop saving. To Newsweek’s credit, they also told American business to stop saving.
The one thing even moderately surprising about President Obama’s nomination of Janet Yellen to replace Ben Bernanke as the Federal Chairperson was his embrace of diversity by nominating a woman. Yellen will continue with Ben Bernanke’s easy money policies that have been killing the recovery since the Great Recession.
As Jeremy Grantham, the co-founder of the money management firm GMO recently told Fortune Magazine:
Higher interest rates would have increased the wealth of savers. Instead, they became collateral damage of Bernanke’s policies. The theory is that lower interest rates are supposed to spur capital spending, right? Then why is capital spending so weak at this stage of the cycle? There is no evidence at all that quantitative easing has boosted capital spending.
Indeed, companies in the S&P 500 broke records accumulating over $1 trillion in cash in 2013 and there is no reason to expect they will not do so in 2014. Think about that when you get your next paycheck.
Give Hayek Some Love
The fact of the matter is that our policy makers and business leaders have unabashedly embraced Keynesian economics and turned America into a consumption economy. This is why the service sector has been the golden child of the economy since the downfall of housing in 2008.
There is no one theory that is applicable to all economies at all times. The reason why positions such as the presidency and fed chair are backfilled is because policies, including economic policies, require ongoing management and adjustment. Theories must be implemented as called for by the economic conditions of the time.
If interest rates remain low, there will likely be no prospect for capital spending or personal investment and savings in the near future because the expected return will be low. When interest rates increase, people will see the opportunity cost of not saving and investing because the return on investment will be greater.
It is time for the Federal Open Market Committee (FOMC) to quit its easy money policy and raise interest rates. Politicians in Washington D.C. must implement pro-growth economic policies to increase production and decrease consumption while they themselves practice austerity with the government coffers. American business must invest its own money in capital spending and research & development and stop selling jobs to the world’s lowest bidders.
These are our recommendations to reinvigorate the U.S. economy. Unfortunately, especially with the nomination of Janet Yellen as Fed Chair, we will likely continue with the same economic and government policies we have since 2001. Just because Albert Einstein defined insanity does not mean we will avoid it.
David Auten and John Schneider are The Debt Free Guys. After paying off over $51,000 in credit card debt, they have dedicated themselves to helping people live debt free, have fun and be Money Conscious. They are the authors of four books including 4: The Four Principles of a Debt Free Life available on Amazon now.