A truism in any economic system, is that savings are the source of capital for development. In an ideal, honest situation, a bank can loan only what is has on deposit. If a person wanted to start a company to make widgets, and it would cost $100,000 to start the company, it is to be assumed that he would have a minimum of $20,000 or 20% of the required amount himself. The would be entrepreneur, would then need to borrow maybe $80,000 from the bank, with which to start his company. The new company would probably have $80,000 worth of tangible assets, and the bank would have a lien on those assets, to secure its loan. The bank might charge 8% interest for the loan, which was secured with the widget firm’s assets, and the entrepreneur would have saved $20,000 to begin his operation.
The bank would loan its depositors’ (savers) dollars to fund the loan. The savers would be receiving maybe 4% interest for allowing the bank to loan their money. The difference between 4% and 8%, gives the bank a profit, and pays for its employees and facilities. The businessman who is going to make widgets, has saved $20,000 for his adventure. The borrower of the $80,000, has secured his loan to the bank. He has used his savings as seed money, and the bank has loaned its depositors’ (savers) money. All is well, and the risk is spread according to the risk taken. The bank has risk if the business fails, and may not be able to recover its $80,000 if the liened upon tangibles aren’t worth that much. The depositors are at slight risk, as their money has been loaned, but the bank undoubtedly has insurance to cover depositors’ risk. The entrepreneur has risked the most, as not only does he owe the bank $80,000, but he has invested his savings in the venture. This is how it ought to be, and was until FDR began his Presidency.
Think about it for a minute. The widgets were going to be made in the USA, out of raw materials mined in the USA, the bank was a U.S. bank, and the depositors were American citizens. The widgets were going to be sold in the USA, and were made with American labor. The bank loaned money it had on deposit from savers. It was all so nice. But it isn’t nice any longer, because the model for savings, investing, venturing into a new business, etc. are all twisted out of shape so much, that the process is totally unrecognizable.
Americans are saving less than one percent of their earnings. We are at the very bottom of the savers of the entire world. Notice, that in the above model situation, the only credit involved, was from the bank, who loaned its depositor’s funds at a profit. Americans were buying homes, and borrowing money to buy them long before FDR. The first savings and loan company was in the 1850’s in the Frankfort section of Philadelphia. They loaned money deposited by savers in the same way that the bank loaned the $80,000, but for a longer term. The loans for the homes were secured by a lien on the home. A mortgage if you please. The balance was not upset, and savers financed borrowers, as it should be, and always was in America until 70 years ago.
Why don’t Americans save? Two reasons, but in the main, one big one. The main reason, is that they have nothing left after paying bills with which to save. Americans, as well as their government, are in debt to the tune of close to $50 TRILLION dollars. Some say $70 trillion. Americans generally owe for everything, and this includes just about everything they use, live in, and even eat. When the normal situation existed 70 years ago, there were no credit cards if you can imagine that. No plastic money, and for that matter no plastic. Homes were financed at 80%, not 100% or even 115%, as is a common situation with second mortgages now. Cars might have been financed for a brief period of time, with a hefty down-payment, but what goes on now, was unheard of 70 years ago. Car ads now, don’t even mention no interest finance, but rather how much per month the lease will cost. Bankruptcies are at all time highs, as are foreclosures, meaning the economic situation of 70 years ago, is long gone.
Still, we hear that the economy is booming. Can this be true, when no one is saving, and debts are at all-time highs? Some say yes, because home ownership is at all-time highs, and the stock market hasn’t crashed. Supposedly, jobs are being ’created,’ and everyone seems to be happy and well. How can this be, when no one is saving, when saving is supposedly necessary for economic growth? If there are no savings, where is the capital coming from to ’create’ all these new jobs? I place the single quotes around the word ’create’ because I don’t think government can create jobs, only destroy them. I am reminded of the laid off computer whiz, whose job was taken by someone in India, and he was working at three menial jobs to equal his former salary. Instead of one job, there are now three. Is this progress?
Getting back to savings: Some may say that they are saving by increasing equity in their homes, which few do, or are owners of stocks. This is an increase in equity, and part ownership in a corporation, but is not savings, which can be quickly accessed or withdrawn, in a normal situation. Home equity and stock ownership, are not savings which can be loaned by a bank to a would-be entrepreneur. Formerly, the funds for buying a home or starting a business, came from savings. Now, few banks or S&L’s take any risk at all in financing a home. They charge a 1% fee, which is their profit, and promptly sell the mortgage to Fanny Mae or Freddie Mac, which creates money out of nothing, since they are a semi-arm of the federal government. Banks which have less on deposit than they loan, can create money by simply placing the funds in the borrower’s account, thereby creating money out of thin air. No savings necessary. Credit card debt, further increases the money supply, as does deficit financing of government debt, lopsided trade deficits, plus high percentage mortgage and auto debt.
What used to be a well lubricated, easily understandable, economic scenario, has now developed into one huge debt ball, which unfortunately, is rolling downhill with increasing speed. As has been mentioned twice before in my columns, those who saved by contributing to pension funds, are being defrauded. Those dollars, which are true savings, have been removed from paychecks, but have not been placed into the pension funds, and employers have not been contributing their share. These savings have evaporated in far too many instances, resulting in no savings. How can a nation consume what it doesn’t produce? How can a nation have a booming economy, when everyone owes everyone, and there are no savings? How can a government which is a world wide power, have more debt than any other nation? How can the whole thing continue to operate, when the debts are equal to, or in excess of value? The word is “BUBBLE.”
What is a bubble? A bubble, by definition, is a stretching of an element beyond its normal size. How does this happen? It happens by thinning its walls, lessening its strength, and increasing its size. It looks grand. Look at a typical bubble. Ever chew bubble gum? (Remember ’Bub’ and Fleer’s double bubble?) I have, and a lot of times, especially when I was a kid. The bigger the bubble gets, the thinner its surfaces are, till it gets so thin, that it bursts. Soap bubbles are the same phenomena, as are economic bubbles.
Well, how about buying gold and silver? Isn’t this saving? It is certainly protecting ones self from decreasing value currency, and makes a lot of sense. It shouldn’t be necessary to buy gold and silver to protect ones self, because saving in the currency should be a viable means. Saving in gold and silver doesn’t give banks money to lend, because the wealth is in your hands or safe, and not in the form of dollar savings accounts in a bank. Banks don’t need your savings to loan anyway, because they can create money out of nothing. Is anyone saving? Anywhere? Does it make sense to save? Isn’t savings what makes everything work? Without savings, won’t the economic system crash? More next week on savings, but in the mean time, protect yourself.