If you recall, in the past we spoke about a different kind of hoarding, more specifically the hoarding of money like assets. We covered how this is dangerous and unproductive for society. Now it is important that we cover the flip side of that equation, the hoarding of capital (saving).
First, in order to understand why saving is good, we need to recognize the difference between hoarding (saving) and investing (spending). What we have come to think of as “savings” in the current economic paradigm is actually not saving at all, it is spending. Allow me to explain.
When you open an account with a bank in 2020, except in some rare exceptions your money is held in what is called fractional reserve. This means that a large portion of your funds are used to collateralize loans which the bank issues out to make profits, and provide other members of their services with access to credit. A percentage of these financial gains are then paid back to you in the form of interest, and many financial institutions will even offer a money market account that allows you to better leverage this lending relationship for higher interest rates on your “savings”.
Now there is nothing inherently wrong with this service, as long as it is clearly understood, up front, by the users, that they are lending out their capital to the bank so the bank can collateralize debt. In a free market, the bank must choose a careful balance between lending to trustworthy clients that are likely to make good on their debts, and keeping a cash reserve in order to make good on withdrawals made by customers who wish to access their “savings”. Issues have drastically changed the nature of this relationship in the current paradigm because of rules like FDIC and the lender of last resort (The Federal Reserve).
The reason these services has disrupted the natural order of risk in lending is quite simple. In a free market, a bank that has more net malinvestment than profitable investment, would suffer losses. If they accrue enough of those losses they go bankrupt and cannot make good on their deposits. Both the bank and potentially all of its clients are at risk of losing their funds. Good banks would thrive and grow with increased profits and bad banks would go out of business. But all of this changed during the banking reform of the 1930s.
Lending carries with it inherent risk of loss. Lending is an investment. You are “spending” your capital at a chosen moment in time, with the hope of receiving the principal, plus some profits back at a later point in time, after your debtor engages in some sort of productive, profitable activity. You are not guaranteed to make profits in a free market system, nor are you even guaranteed the return of your principle.
Saving, on the other hand, or what the Keynesians lovingly call “hoarding”, is the deferment of consumption of capital (or deferment of spending). Saving accumulated capital allows one to better plan for the future, and postpone investment until well researched and promising opportunities present themselves. This is extremely important in a free market economy because investment, as we discussed, carries inherent risk of loss. Not only is the deferment of consumption wise for making more informed investments, but it has the double benefit of being a deflationary activity. Being a frugal saver actually makes everyone else’s relative purchasing power increase (in a system with a free market money like Gold or Bitcoin) as money is taken out of circulation. Deflation is good for savers.
The bottom line is this: Modern day saving has been purposefully conflated with lending and the liquidation of mal-investment has been artificially postponed by government regulations and money printing. Keynesians justify this with what they call “maximizing the productive use of capital” which we will cover in more detail in tomorrow’s newsletter. But it is important to remember that saving is the deferment of consumption and investment is spending. Savings accounts with a bank are not actually saving, but investment with a facade of zero risk of loss.
Book of the Month: The Dao of Capital, By Mark Spitznagel
-“The bridge from the seen to the foreseen is crossed purposefully, via a teleological path of means and ends—our familiar Ziel as Mittel to achieve a Zweck, the common thread of the Clausewitzian strategy. Means are teleological; that is to say, means are tools used in service of a telos, an end or goal.”