Savings

Whenever an outside force, such as government, encourages or demands that savers make loans for reasons that may have nothing to do with the actual likelihood of repayment, higher degrees of loss are almost inevitable. Such distortions waste society's savings.

In their zeal to do something good, governments like to influence the way savings are lent out. They pass laws that make some types of loans more appealing than others. But government has no savings; only individuals do! If, as a result of government incentives, the loans go to individuals or businesses that fail to pay off (as they often do), then the loss falls to those individuals who have sacrificially under consumed to create savings!

In fact, Able would be much less inclined to lend in the first place if he were forced to make loans that he felt were excessively risky, such as in the case of fish hypnosis. As a result, he may decide not to work as hard, or not to sacrifice as much to save!

— Peter Schiff; How an Economy Grows and Why It Crashes

[...] savings can mean the difference between the life and death of society.

— Peter Schiff; How an Economy Grows and Why It Crashes

Unfortunately, it is widely accepted that in order to spur activities that politicians and social theorists deem to be beneficial, government influences how savings are allocated. This has been accomplished by a litany of government loan guarantees and corporate and individual tax credits and penalties.

As a result of these influences, individuals and businesses may be more willing to apply for, and banks may be more willing to grant, certain types of loans. More of society's resources are then directed toward the favored activity, whether it be home building, college attendance, or solar panel manufacturing.

Central to these impulses is the notion that government planners have a better idea of what's good for society than savers themselves. But there is no evidence that this is true. In fact, history is littered with grandiose schemes hatched in government think tanks that have simply not delivered their promise.

— Peter Schiff; How an Economy Grows and Why It Crashes

Savings are not just a means to increase one's ability to spend. They are an essential buffer that shields economies from the unexpected.

Suppose a monsoon came through the island and wiped out both mega fish catchers? Although many economists today view natural disasters as stimulative to an economy, the truth is floods, fires, hurricanes, and earthquakes destroy wealth and diminish living standards. If the fish catchers were wiped out, the island's fish production would drop, and Able, Baker, and Charlie would have to underconsume again in order to generate savings to rebuild their capital.

But, remember, a pool of spare savings prevents disruption and allows for immediate reconstruction of damaged capital. That is why it is essential that Able, Baker, and Charlie continue to underconsume and save for a rainy day.

— Peter Schiff; How an Economy Grows and Why It Crashes

In the past, the United States was known as a nation of savers. Throughout much of our history American citizens typically saved 10 percent or more of their incomes annually. This discipline not only helped build a huge supply of savings to finance our growing industrial activity, but it also helped families and communities endure unexpected hardships.

However, in recent years, economists have severely downgraded savings on the economic value chain. In fact, as far as many economists are concerned, savings are a drag. Keynesians view savings as detrimental to growth because the act removes money from circulation and decreases spending (which they assume is the crucial element in creating economic growth). Policy makers, influenced by these ideas, have made rules that reward spenders and penalize savers.

As a result, Americans have, for years, spent more than we have earned. In a contained economy, like an island, this would be impossible. But in our modern world, the flow of money across borders and the seemingly magical qualities of the printing press have temporarily blinded many Americans to the simple truth that we can't consume more than we produce, or borrow more than we save...at least not for very long.

— Peter Schiff; How an Economy Grows and Why It Crashes

When the economic headwinds began to pick up in earnest in 2008, politicians and economists reflexively looked for a means to get consumers to spend even more and save even less. They have it backward. Spending for its own sake means nothing. What if you spent $1 million, but bought nothing but air? How would this benefit society? It would surely benefit the person who sold you the air. He would get the million dollars formerly belonging to you. Using our modem methods of economic accounting, such as the measurement of gross domestic product (GDP), such a transaction would certainly look like genuine activity. It would be counted as $1 million worth of growth.

But the act of buying air does not improve the economy as a whole. The air was always there. Something has to be produced to give the spending any value.

Spending is merely the yardstick that we use to measure production. Since everything that is produced will eventually be consumed, why does spending really matter? Even the stuff that no one really wants will be consumed if the price falls far enough. But nothing can be consumed until it is produced. It's production that adds the value.

Saving creates the capital that allows for the expansion of production. As a result, a dollar saved makes more of a positive economic impact than a dollar spent, just don't try to explain this to an economist or a politician.

— Peter Schiff; How an Economy Grows and Why It Crashes

Who hasn't been out of work at some time or other, or had an illness or accident that created unexpected expenses? The old and trite notion of "saving for a rainy day" is old and trite precisely because this has been a common experience for a very long time.

What is new is the current notion of indulging people who refused to save for a rainy day or to live within their means. In politics, it is called "compassion" - which comes in both the standard liberal version and "compassionate conservatism."

The one person toward whom there is no compassion is the taxpayer.

— Thomas Sowell; Dismantling America