Posts Tagged ‘fedspeak’

Alan Greenspan Announces That Savings Are Important

Sunday, September 7th, 2008

It only took former Federal Reserve Chairman Alan Greenspan eighty-two years to figure it out– perhaps it’s something that a government economist better grasps once semi-retired– savings matter.

In the clips I’ve seen of the film I.O.U.S.A., one does admittedly need to untangle multiple strands of unregenerate Greenspan self-inoculation to discover the savings devotee.

But if Greenspan knew how to speak something other than Fedspeak, and had even a slight capacity for self-contemplation, he might have addressed the topic something like this: “Suppose that America had the great fortune that I had never been born, and somehow a less narcissistic appointee with a little more resilience of character than a newborn lamprey had been Fed Chairman in my stead.  Further suppose that this responsible Fed Chairman didn’t believe that his or her primary career goal should be to make the U.S. dollar a persistently unproductive vehicle for domestic saving, and savings for Americans a punishment.”

“Under this circumstance,” the imaginary reflective Greenspan might continue, “a person might forgo consuming all his or her income– perhaps for example, buying a used economy car instead of the new luxury car the saver’s full income might have bought, investing the difference.  If this additional investment is productive (and I assume it might be provided I’m not in charge), then the saver can someday buy the new luxury car as a proportionally smaller expenditure, and still keep up the additional saving, therefore further on up the road also buying, investing in, or accomplishing who knows what else. Extrapolate this to a nation, and its various economic actors, and the story is similar, but much bigger– almost unimaginably bigger.”

Henry Hazlitt titles a chapter of “Economics in One Lesson“, “The Assault on Saving”.  Here’s a passage on what real saving can accomplish on a national (or higher) level.  The context of the quote is Hazlitt’s assessment of the much too common and perverse assertion that excessive saving could cause an economy to stall:

“There will not be a ‘surplus’ of capital until the most backward country is as well equipped technologically as the most advanced, until the most inefficient factory in America is brought abreast of the factory with the latest and finest equipment, and until the most modern tools of production have reached a point where human ingenuity is at a dead end, and can improve them no further.”

In other words, quite possibly never.  Hazlitt continues:

“But how can the additional capital be ‘absorbed’?  How can it be ‘paid for’?  If it is set aside and saved, it will absorb itself and pay for itself.  For producers invest in new capital goods—that is, they buy new and better and more ingenious tools—because these tools reduce costs of production.  They either bring into existence goods that completely unaided hand labor could not bring into existence at all (and this now includes most of the goods around us… ); or they increase enormously the quantities in which these can be produced; or (and this is merely saying these things in a different way) they reduce unit costs of production.  And there is no assignable limit to the extent to which unit costs of production can be reduced—until everything can be produced at no cost at all—there is no assignable limit to the amount of new capital that can be absorbed.”

The saving and investing that Hazlitt points to– the type that perhaps the U.S. could have continued at a high rate in the absence of obfuscation from Greenspan and government– wouldn’t necessarily have been used for Corvettes and Cristal. (Although for me personally, the lack of these luxuries may explain my persistent episodes of Greenspan rage.)  As much of these additional available investments would in likelihood have been made in child education and smokestack scrubbers.There’s all the political traction of a greased Gordon Gekko on roller blades, but if we want them, the facts are there.  On both an individual and societal level, our behavior changes as we hit new levels of copiousness.  Wealthy individuals may treat themselves pretty well before they start the charitable foundations, but they overwhelmingly do start the foundations.  The U.S. interest by consumers and entrepreneurs in the environment may follow interest in SUV’s and yachts, but it does follow– we can see its elevation in the U.S. compared with what’s yet to be awakened in China’s fresher consumerism.If we could have maintained an adherence to first legal principles, economic common sense, and a level playing field, then the evidence is that we could have had it all– individuals happy in making their own choices, and society benefiting (at the margin so to speak), from individual satisfaction. We decided to try Greenspan instead.

If a corporation borrows more than they can ever repay from their production, then they’ll have to pay back out of capital- the company has to shrink.

The same can happen to a nation, and we can tell it’s happening to the U.S. as we watch the purchase of American producing assets by foreign entities.

Here’s a Hazlitt quote again, that makes a pretty good summary of the wondrous work that Greenspan (and the Federal Reserve) has done in “managing” money and interest rates:

“The money rate can, indeed, be kept artificially low only by continuous new injections of currency or bank credit in place of real savings. This can create the illusion of more capital just as the addition of water can create the illusion of more milk.”

Alan Greenspan was indeed “The Maestro”, and what he orchestrated was The Great American Liquidation– a kind of yard sale where we could grab and quickly spend a few cents on the dollar from broken up pieces of hundred year gains.

By Les Lafave

Abolish The Federal Reserve –