Lies We're Being Told: Interest is Consumption, Saving is "a Negative Act"

By: John Rubino | Tue, Feb 2, 2010
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The latest piece of deep thought from iTulip's Eric Janszen explains why, if the recession is over, so many people remain in such bad shape. More specifically, how can U.S. GDP be up by a robust 5% when oil imports and rail traffic are down and unemployment is still rising? The answer, in a nutshell, is that once again we're being conned. Get this: Washington defines interest on credit card debt as "consumer spending" and adds it to GDP. So as debt soars, the gap between what we spend and what we actually receive grows, but the economy appears to improve. Eliminate that accounting trick and the numbers look like most people feel, very bad and getting worse.

Here's a small but crucial part of Jansen's argument. A couple of acronyms that might require explaining are FIRE, which stands for "finance, insurance, and real estate", the industries that come to dominate an economy during the late stages of a credit bubble, and PCE, which stands for "personal consumption expenditures".

Retail Sales measures sales of goods by retailers to consumers. Goods PCE measures the purchase of goods by consumers, plus the imputed interest payments on the debt taken on by consumers when they use credit to purchase these goods.

What you are looking at above is a Productive versus FIRE Economy comparison, the impact of the rise in the use of credit by consumers to purchase goods, and also home price inflation, since 1959. Note that the inflection occurs, as other charts we have shown you over the years, around the time of the end of the international gold standard and birth of the FIRE Economy in the early 1970s.

Notice also the impact of compound interest on the shape to the Goods PCE curve compared to the linear growth shape of the Retail Sales curve. The chart shows a layer of FIRE Economy sitting on top of the Productive economy, approximately $1.5 trillion in PCE on top of $2 trillion of Retail Sales in Dec. 2009 on an annualized basis. It is, as far as we know, the first chart that depicts the additive impact FIRE Economy to the Productive Economy.

While the FIRE Economy has largely recovered, the "real economy" remains sick.

How did we devolve from an economy based on making real things to one in which "imputed interest" is officially counted as wealth? According to the Future of Freedom Foundation's Gregory Bresiger, Keynes did it:

If this latest stimulus package fails, candid Obama supporters -- like realistic Roosevelt supporters reviewing his sorry economic record decades after the fact -- will claim that it failed, not because of the philosophy behind it, but because it wasn't big enough. But what is the growth philosophy that the United States now depends on instead of the once-traditional pro-saving approach? Supporters of more of the same Keynesianism -- although it is depicted as "change" -- constantly cite some form of the "paradox of thrift."

Attacks on saving

This paradox is a very old concept. It was famously advocated by Keynes in the 1920s and 1930s. However, he actually filched the idea from inflationists such as the 18th-century philosopher Bernard Mandeville and the Edwardian journalist J.A. Hobson.

Still, this "spend-now, anti-savings" idea seemed very new when Keynes revived it in the 1930s. He approvingly quoted Hobson's Physiology of Industry in his own famous book, The General Theory of Employment, Interest and Money. According to Keynes,

[Saving,] while it increases the existing aggregate of capital, simultaneously reduces the quantity of utilities and conveniences consumed; any undue exercise of this habit must, therefore, cause an accumulation of capital in excess of that which is required for use, and this excess will exist in the form of general over-production.

Keynes contended that saving prolongs a recession while spending reverses it and produces a boom. The boom can go on as long as the government keeps spending and inflating. Keynes made these arguments in The General Theory, which was published in 1936.

Oversaving caused and prolonged the Great Depression, according to Keynes and his followers, because it hurt mass buying power. Economic inequality was also a problem in the 1920s, he believed. This is one reason that Keynesian Obama in 2009 seems as determined to redistribute wealth as he is to restore prosperity. He embraces the Keynesian argument that economic inequality, aggravated by too much savings, causes depressions or recessions. Ergo, today's deep recession can be corrected only by government action.

Too much saving can also block recovery, Keynes warned in The General Theory. "The more virtuous we are, the more determinedly thrifty, the more obstinately orthodox in our national and personal finance, the more our incomes will have to fall."

No one should be surprised that Keynes questioned thrift on economic grounds. His definition of it, in a work of his a decade before The General Theory, claimed it was "negative."

"Saving," he wrote in his Treatise on Money, "is the act of the individual consumer and consists in the negative act of refraining from spending the whole of his current income on consumption."

"Negative act"?

The savings issue for Keynes was also cultural. Before he wrote The General Theory and before the Great Depression, he was arguing that oversaving hurt society in countless big and small ways.

For example, in The Economic Consequences of the Peace, a scathing critique of the Treaty of Versailles after World War I, Keynes compared the building of the railroads in the 19th century to the building of the pyramids in Egypt by slave labor.

The passion to accumulate savings, to make one's property bigger -- and, using Keynes's analogy, to bake a bigger cake without ever eating it -- became a fetish in the 19th century. It hurt the standard of living in myriad ways, he argued.

"The duty of saving became nine-tenths of virtue and the growth of the cake the object of true religion," he wrote. "There grew round the non-consumption of the cake all those instincts of Puritanism which in other ages had withdrawn itself from the world and neglected the arts of production as well as enjoyment."



John Rubino

Author: John Rubino

John Rubino

John Rubino

John Rubino edits and has authored or co-authored five books, including The Money Bubble: What To Do Before It Pops, Clean Money: Picking Winners in the Green Tech Boom, The Collapse of the Dollar and How to Profit From It, and How to Profit from the Coming Real Estate Bust. After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a currency trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He now writes for CFA Magazine.

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