Is the savings rate killing the economy?

I saw this article today on CNN and had to save the link so I could comment on it tonight when I had time.  The headline reads Why saving is killing the economy.

To put it bluntly, this is one of the most inane, ignorant, and generally stupid stories I’ve read in quite some time.  The author evidently doesn’t quite get the concept that Capitalism requires capital – otherwise it’s just “ism” and that makes no sense at all.  🙂

The savings rate, as calculated by the Commerce Department, hit 3.6% in December, or the equivalent of $36 for every $1,000 of after-tax income.

That’s up from 0.8% in August, or only $8 of every $1,000 of income. And since the average income for Americans is flat to slightly down during the past few months, the only way the savings rate can rise is for spending to fall.

“That’s a lot of spending that’s not happening,” said Mark Zandi, chief economist for Moody’s He said the jump in the savings rate since last summer is “the difference between an economy that is growing and one that is struggling mightily.”


The definition of “savings” that they use is so broad that you could easily declare bankruptcy even though you may be “saving” 75% of your income each and every month!  No, I’m not kidding.  Here’s another quote from the story.

The government calculates savings by totaling up after-tax income and subtracting spending. The remainder is considered savings by the government even if consumers are using the leftover money for investing or paying down debt instead of saving it in a bank.

See what I mean?  They are calculating the official savings rate in such a way that every single dime you pay on a credit card bill is counted as savings.

Did you make a $400 car payment last month?  Whoo hoo – you saved money!  Did you make a $1200 mortgage payment?  Cha-ching!  More savings!  Did you pay Vinnie some of that money you borrowed from him at 8,726% interest?  You are saving waaay too much money dude – and Mark Zandi with Moody’s says you’re causing the economy to struggle mightily.

I have no explanation other than Mark Zandi is a total moron.

(Added 2/13/09 – As “Dufus” pointed out in a comment below, when they say “paying down debt” they are most likely referring to the interest portion of a debt payment and not the entire payment.  “Dufus” may be correct (I doubt it) but the story makes no mention of it.  I won’t infer a meaning that the story doesn’t mention.  Either way, it’s not “savings”.  To make this clear, if interest payments you make were a form of “savings”, you’d want the highest interest rate on any loans and credit cards you used – not the lowest.  That way you’d spend more on interest and you’d “save” more money.  I’m not buying it.)

I’m guessing that he’s the kind of economist who thinks that when he buys a 50 inch flat screen plasma TV for $900 at a 50% off sale, he just saved $900.  Idiot – he just SPENT $900, but he walks around bragging to his economist buddies that he saved a shitload of money.

These are the kinds of people that our government is taking advice from on how to “stimulate” the economy.  Do you wonder why we’re going to hell in a handbasket?

Hopefully, most readers of this will understand that the above “savings” are false.  If not, I don’t think I can help you.  Please go back and retake 1st grade math.  Simple addition and subtraction are all that’s required here, no “higher” math like multiplication or division is needed.

Ok, I’ve had fun with the misnamed “savings rate” but I haven’t addressed why these morons think savings is bad for the economy – and why they’re 100% wrong.  Here goes.

When you pay on a debt, you’re simply paying back the person (or institution) who loaned you the original money to buy that thing you didn’t have enough savings to buy at the time.  How did they get the money?  Someone had savings – otherwise known as capital – that they were willing to risk hoping that they would make money on their investment.

They didn’t spend it, they saved it.  Investment is also a proper term to use for this capital.

You borrowed it.  You spent money you didn’t have in order to get that widget today instead of waiting until you had enough of your own money. You spent someone else’s savings.  When you pay them back, you aren’t saving anything, you’re simply replenishing someone else’s savings.

But take it one step further – what are savings anyway?  In it’s simplest form, savings are the results of production that aren’t consumed immediately.

Here’s an example.  If I plant a garden and grow enough food to feed myself and to continue live, I haven’t saved anything.  I’ve consumed everything I produced and there’s a net gain of zero.  Much of the world lives like this on a daily basis.  They consume everything they produce and there’s nothing left over.  No savings.  Nothing to live on during the winter or dry season.

Now suppose I get to be really good at gardening.  I specialize in growing (for example) corn and potatoes.  I get so good at it that I produce double the food that I need to live.  Half of my crop each year is “extra” because I don’t need it immediately.  If I put it in a shelter for storage, I’ve saved it.  Real savings.  Something I can point at and say “I made it, that’s mine.”

Now what happens when winter or the dry season comes?  I continue to live while those who didn’t have savings die.  Brutal, but effective.  (And especially relevant on Darwin’s 200th birthday, but that’s a different story.)

Let’s say I still have corn and taters left over when my next harvest comes in.  What do I do with it?  I don’t need it to live.  It’s still my savings.  Hey!  What if I loan it out those idiots who aren’t as productive as I am?  What if I allow them to use it in return for them giving me something I want in return?  Maybe they get a bumper crop of oranges next year and I could sure use some citrus to add variety to my diet….  Or maybe I take their daughter in exchange.  🙂

It doesn’t really matter what I exchange my saved corn and potatoes for – because I just invented Capitalism!

Please note how this happened:

  1. I had produced more than I consumed (savings/capital)
  2. I traded my excess production (savings/capital) for your excess production
  3. We both live better than either of us did before – via free trade

There’s a more important concept coming.  I promise.  Bear with me.

The problem with the scenario above is that all of the excess production is perishable.  What happens if my potatoes or your oranges spoil?  In that case, we haven’t actually gained anything, and we’re right back where we started.

Hmmm…  What if we come up with something that doesn’t spoil that we both agree to take in trade as a token of our excess production?  It needs to relatively rare so everyone doesn’t get it and pretend they’ve produced more than they’ve consumed, and it needs to be easily transportable.  Cattle would work – but they can die and cause me to lose my excess produce just as if my potatoes had rotted.  How about gold?

That’s it!  We both agree that a set amount of gold is worth a certain amount of excess production.  I can give you my excess potatoes and corn for a few shiny pieces of non-perishable metal.  And you’ll take pieces of gold in exchange for your excess production of oranges when I want some variety in my diet.

We just invented money – actually a stable currency that we can exchange at any time for food – or for any other goods or services.  I don’t get any gold until I’ve produced more than I’ve consumed, and neither do you.  After all, you have to have something to trade, and you can’t trade if you haven’t yet produced anything.

Here’s that important concept I was talking about.  What are we actually trading?  Is it simply gold?  No, it’s our excess production/savings/capital.  Gold simply makes the transaction easier.

Now what happens if I have potatoes and you want/need them to survive the winter, but you haven’t yet produced anything that I want or need?  You don’t have any oranges/gold, because you haven’t produced anything in excess of what you’ve consumed.

There are only two possible outcomes here.

  1. I keep the potatoes/gold and let you starve
  2. I give you the potatoes/gold based on your promise to pay me back (with some interest for the risk I’m taking)

Hey!  Look at me!  I just became a fat greedy capitalist pig!

I actually just kept you alive and you should be breaking your back bending over to thank me for saving your worthless life, but because you’re in debt to me, you resent my wealth and hate my guts.  Sound familiar?

What’s actually happened is that I now have a claim on your future production.  You can no longer keep everything you produce, because you need to pay me back because I worked my ass off while you didn’t produce enough to feed yourself.  Stop sitting on your ass and bitching and go out and produce something!

Here’s an even more important concept that Mr. Zandi will never grasp.  It’s often said that “time is money” because time that you spend sitting around doing nothing is wasted time that you could be using to produce something of value.  But the reality is – wait for it – “money is time.”

Money is time because money represents the “stuff” I’ve produced in excess of what I consumed.  Because of my “excess” production, I have “time to spend” because I can use the money I’ve saved (from my excess production) to sustain me while I do other things.  Maybe I sit around and do nothing while using up my savings.  If so, I’ve gained nothing in the end.

But maybe I continue to produce more than I consume, and I continue to loan my excess production to others who haven’t yet produced enough to support the lifestyle they’ve chosen.  I’m investing my excess production in you in the hope that you’ll eventually produce some excess of your own and pay me back.

Do you get it yet Mr. Zandi?  You cannot have capitalism without capital.  And capital is simply another term for savings.  And savings is simply another term for excess production – it’s stuff I’ve produced in excess of what I need to live.

And you aren’t saving a damn thing if you’re simply paying me back.  Especially if you’re paying me back with oranges you borrowed from someone else because your crop failed again because you’re an idiot who doesn’t know how much water an orange tree needs to thrive.  Or you borrowed gold from your brother to pay me back.  Neither one is saving.  Or investing.

There’s a lot more to this story, but it’s now after midnight and I have to get up and produce something of value tomorrow so I can contribute to the savings rate.

Money is time Mr. Zandi.  When I’ve produced and saved enough money, I can spend my time doing other things besides work.  But I’m not at that point yet, because throughout most of my life I’ve tended to consume just about as much as I’ve produced.  It doesn’t help that the advice you’re spewing consists of a claim on part of my future production via taxes – it just means I need to produce more to make ends meet.

You can call my mortgage payment savings if you wish – but I know better.



7 Responses

  1. Not to diminish the extraordinary effort of your diatribe, but I believe Mr. Zandi would be referring instead to the ‘interest’ that is ‘saved’ by paying down debt; and not the ‘principal’ payment itself. This would truly be ‘saving’ money. But don’t feel stupid, it’s probably not your fault.

  2. Most excellent, I agree with you wholeheartedly.
    I’m thinking that you are correct when you said the whole amount of a payment would be counted as savings by the government. For instance, when a car is sold they count the whole amount of the purchase as being spent at that time. It is money going into the economy even if paid for later.
    I had the hardest time figuring out how I made so much money one year when my business checking account did not show much. I ask my accountant, if I made this much money that I’m going to have to pay taxes on, why do I not have this money? We went over the figures and one of those lovely tax breaks I had gotten for buying a machine that was so wonderful the year before had come back bite me. Every payment I was making was now counted as income that I had to pay taxes on.
    Anyway, I loved your rant, it is just right and as I said I agree but the problem with today’s society is that it is too simple. Sure, you and I know it is right, but people don’t respect people like us that know 1 + 1 =2…….they want a panel of experts with PHD behind all their names that have tremendous explanations for things that no one can understand to tell them what the problem is, they don’t want to face the reality that it is just as simple as you put it.

  3. Good piece, but something to consider:

    If I make $1000, but spend $1500 ($500 on credit) my “savings rate” is -50%. If I then make $1000 and pay back that $500, my savings rate is 50%. No, I haven’t actually “saved” $500 by paying back debt, but I didn’t actually “save” -$500 when I spend $500 on credit either.

    Or what if I pay back the $500, but during the same month I borrow another $500 to buy something else? My savings rate is 0%. See the symmetry?

    So maybe the word “savings rate” is misleading, but it’s a good gauge of how much “consumers” (another word to take issue with) in aggregate are changing their status as creditor/debtor as percentage of income.

  4. Good points Mark, your first example makes sense as to how the government calculates the savings rate, and it’s the same as I first suspected. But as you also said, you haven’t actually saved anything.

    That’s my point, the savings rate (while it may give you some useful data) doesn’t actually measure savings.

    Here’s an example – I make $1000 this month. I spend $900 on food, clothing, utility bills, car insurance, gas, etc. As to the other $100 – I put it in a bank or stick it in a mattress. Maybe I even invest it in stocks/bonds/precious metals.

    I have a savings rate of 10% for this month. ($100 saved divided by $1000 earned.) I have saved some of my excess production for use at a later time.

    If I make $1000 and spend $1000 (it doesn’t matter what I spend it on if I can’t get it back) I’ve saved nothing – but yet the government will calculate my savings as 25% if I made a $250 car payment.

    I guess my main point is that calling it a savings rate is ignorant, and it means that the economics guru’s who came up with the term don’t have a clue. Which is what pissed me off when I first read the article and led to the rant.

    Thanks for the reasoned comment!

  5. […] invest (in anything) if you don’t have savings.  Savings are fuel for the economy.  I wrote a long post about this a while back, and maybe I’ll take the time to make it more concise sometime, but the point is […]

  6. […] of money.  The amount of goods in the economy hasn’t changed at all.  If you read through an earlier post of mine, you’ll see that money is simply a way to facilitate transactions – but all money needs to […]

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