BlackRose#125
"One of the greatest areas of economic fallacies in the investment media is the favoring of consumption over savings and investment. It is widely reported, for example, that Americans provide the "engine of growth" in the world economy by consuming what others produce. Americans are described as doing the entire world a favor by consuming the goods that others produce, without which they would all presumably be unemployed. Commentary often describes consumption as if it were hard work, "heavy lifting," or otherwise a highly meritorious and benevolent activity.
Consumption is the fun part, while savings and production is work. While consumption creates demand for the products of others, the point that is missed by most of the media is that demand must be funded by supply. Unfunded demand created by printing more paper is simply a drain on the productive efforts of some by the recipients of the paper. Schiff writes:
The world no more depends on US consumption than medieval serfs depended on the consumption of their lords, who typically took 25 percent of what they produced. What a disaster it would have been for the serfs had their lords not exacted this tribute. Think of all the unemployment the serfs would have suffered had they not had to toil so hard for the benefit of their lords.
The way modern economists look at things, had the lords increased their take from 25 percent to 35 percent, it would have been an economic boon for the serfs because they would have had 10 percent more work. Too bad the serfs didn't have economic advisers or central bankers to urge such progressive policies.
In contrast to the anti-savings bias of the financial media, Schiff understands that savings are necessary to fund economic growth:
It is important to remember that in market economies living standards rise as a result of capital accumulation, which allows labor to be more productive, which in turn results in greater output per worker, allowing for increased consumption and leisure. However, capital investment can be increased only if adequate savings are available to finance it. Savings, of course can come into existence only as a result of [consuming less than one earns] and self-sacrifice."
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