Personal Savings, Almost Drained

Reality and fantasy have become entangled [Gilder's Daily Prophecy] August 02, 2021 [UNSUBSCRIBE]( | [ARCHIVES]( [>> Urgent Message From George Gilder <<]( Street is [exploiting an unfair advantage they have over folks]( you… And they’re making BILLIONS — even if the market tanks. It’s time you had a way to protect yourself — even potentially profit. [Click here to find out how now.]( [Warning] Do you enjoy receiving Gilder's Daily Prophecy? Please [Click Here Now]( so we know to continue sending you Gilder's Daily Prophecy for free! Personal Savings, Almost Drained [Jeffrey Tucker]Dear Daily Prophecy Reader, A monetary feature of an economic crisis is that people cling to cash. They get scared. They get risk averse. They know for sure that having money in the bank or the mattress might not save the day but it is a darn good idea. The impact of that decision has good effects, both at the micro and macro levels. It leads to a rise in personal savings. In economic terms, that is an increase in the demand for cash, which the banking system can accommodate. If the Fed accommodates it, the inflationary effects are mitigated by a decline in velocity – a fancy word that merely refers to the rate at which money is spent on goods and services. What does this mean for the prospects of recovery? In classical theory, it bodes very well! It means that resources are being stored up to be released later to be used in consumption and investment. It’s the investment here that matters for future growth. Financial institutions have more capital to be used to back projects into the future. Once the crisis passes, you have now a great foundation for future growth. A good example of this happened after the Second World War. From 1933 to 1946-48, the velocity of money had fallen dramatically. This frustrated the monetary planners in Washington, but the payoff came after the war ended. The socked-away resources were put to use, building one of the great economic recoveries of the 20th century. It works like a building. Savings are deferred consumption, giving up what could be devoured today with the hope of having a better tomorrow. Savings become capital which is the foundation for the building, while the production structures built on top create layers and layers of goods and services, while providing jobs and growth. [Government rule to unleash $15.1 trillion?]( Keynesian Theory Begs to Differ That’s the classical model in any case. In the early 1930s, a different point of view came to the fore, as pushed by Lord Keynes. He said that heightened savings was not a solution to depression but the very problem government should seek to solve. The “hoarding” by individuals was holding back recovery. It created a “paradox of saving”: what seems to be good for individuals is bad for society. This was considered to be a problem to fix. This could be done by vast new government spending to boost demand for goods and services, or by deploying the printing press to discourage savings. It was a classic error of mixing up cause and effect. It’s always a feature of economic depression that savings rise. Keynesians look at this effect and confuse it with a cause, like the belief that umbrellas are somehow triggering clouds to release precipitation. This is what prompts every manner of crazy policies that end up prolonging the crisis, which is exactly what happened throughout the 1930s. Full recovery from that disaster did not really kick off until after the war ended. For some reason, a version of this fallacy came roaring back in 2008. The falling housing sector was a sign and symbol of the crisis, the main effect of a reversal of an unsustainable boom. The only real solution was to allow prices to settle back to their proper equilibrium. You have to deal with the pain to experience the recovery. But no, the Fed would not have it at all! It struggled for years to keep the market inflated as much as possible. These weird devices are about to appear all over America to America’s top tech futurist – dubbed the “Tech Prophet” by Forbes – millions of these strange little devices are about to appear in every corner of our country… including your home. What are they? And why did one tech insider with connections to Apple and Microsoft claim they’ll “rewrite the rules of what’s possible?” [Find out more right here.]( [No more banks. No more accountants. No more Wall Street?]( The Current Crisis Whatever the policy errors of the past, there is nothing to compare with the absolute insanity of 2020, when the government and the Fed attempted to act as a full replacement for a functioning economy and social order. Now that is utterly insane. It literally means trusting printing machines and debt to create data illusions that do not reflect reality on the ground. And of course it did not work. The crash of last year was devastating, and no amount of recovery that we seem to be experiencing this year can come close to making up for the destruction. However, there was one redeeming feature of economic events of last year, namely a huge increase in personal savings. The typical personal savings rate since 1960 has toggled from as high as 10% to as low as 5%. But at the height of the lockdowns last year, it shot up to 25%. To be sure, some of this reflected the direct payments to individuals dished by government, but this was not the whole of it. The velocity of money, which is the flipside of this trend, crashed as well. This trend provided a foreshadowing of some measure of future salvation for the US economy. Here’s what is truly fascinating, however. All these gains that the US economy had bagged in terms of its long-term prospects are now almost entirely depleted. The demand for cash in the bank has fallen back almost to pre-pandemic levels. [Pesonal Saving Rate] What does this mean? In terms of inflationary pressure, it suggests we are at the tail end of forces that had previously suppressed prices. All else equal, it could portend dramatic increases simply because there is so much hot money on the street now as compared with a year ago. The Fed uses the implicit price deflator of personal consumption expenditures to forecast inflation. The rate of change in the index itself has now exceeded even what we saw in the late 1970s. To be sure, regular people do not use this tool for inflation assessment but the Fed does, so there is no way that they do not know the threat that is out there. There are mitigating factors at play but looking at the pace at which people are draining what they saved does push up prices of goods and services in all sectors. In terms of investment, it suggests that we are blowing our chance to rebuild on a solid foundation. To be sure, [including]( the cash socked away by institutions makes the trends look less terrible but we are still a long way off from pandemic highs. How Fragile Is the Fake Recovery? Bouncing back from total lockdown was an inevitability. How could it not be? But this recovery is also seriously compromised by the introduction of many trillions in government spending that zoomed up fully 11.8% over the course of the pandemic. It is not possible to pursue that kind of policy without adding in distortions. In normal times, a huge increase in personal savings followed by a deployment of those savings in future investment would be something to celebrate. These are far from normal times. Reality and fantasy have become entangled together in a contest to see which one will prevail in the short term. In the long term, we already know the answer. Regards, [Jeffrey Tucker] Jeffrey Tucker Check. Check. Check. Passed all tests. 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