Wednesday, October 13, 2010

The Great Savings Crisis.

Canada and broader western society is in the midst of a savings crisis that is going to lead to a drastic decline in the living standard to which we have grown accustomed. A low to negative savings rate (meaning people are sustaining their living standards on borrowed money) will inevitably result in either reduced prices for stocks and securities due to a smaller pool of money available to purchase them, or a general increase in the prices of the goods and services that we need to survive due to governmental initiatives to print and generate more money to help keep the house of cards from collapsing. At the first sign of a panic in the stock and bond markets, the government has shown that it would rather reduce people's wealth via inflation than have them experience a decline in their portfolios.

In 1987 Gordon Gekko in Wall Street said that "greed is good." His argument was that through greed people strive to innovate and generate greater degrees of wealth and prosperity for all. And of course, that has always been the basic argument for Smithian economists. But greed, in its many forms, will also lead to the decline of the very economic system that it helped to thrive. The current North American economy is very much dominated by the business of finance. As a people, we now produce very little of tangible value that can be sold to others or used for our own benefit. Intangibles, the creation of investment securities and insurance vehicles, and their subsequent transfer to others, has become the basis of our economy. The old economy, or the traditional manufacturing businesses that were a staple of American growth and prosperity, have largely vanished and been shipped overseas. With them, the jobs and steady stream of income payments for households have begun to vanish as well, leaving a plethora of retail jobs that provide very little in the means of long-term prospects for employees.

Why is this shift important? For the public to sustain its living standard and for the finance industry to continue making more money, the volume of traffic in debt instruments and consumer credit must increase because most people do not earn enough income to satisfy their current wants. People want larger houses, more cars, newer clothes, and innovative technologies, but they do not want to have to save up enough money to buy them. Cheap and easy credit have made it simple for people to escape the basic economic problem that finite resources means that we must limit our wants. This can only go on for so long, however, and low savings will inevitably result in reduced consumption when the governments are finally unable to prop up failing banking institutions that have irresponsibly been continuing to lend money to people with little prospects of ever paying it all back.

A recent poll shows that 38 percent of Canadians are unable to save either because they have nothing left over after paying bills or because they are impulsive spenders. Clearly, with Canadians only saving about 2 percent of their income, and owing about 1.50 for every dollar they earn in a year, the nation is not preparing itself to have a very bright future. The best strategy to deal with this crisis? Tangible investments in companies that produce commodities and products or services with an ability to increase prices at least in line with inflation. And also, a personal savings rate that is at least 7-10 percent, not 2 percent! If this type of savings rate is not being achieved, re-evaluate your spending habits... something is wrong, you are spending beyond your means. Avoid the debt trap, it is rampant in North American and will only get worse. Also, housing DOES NOT always go up in value and interest rates WILL NOT stay this low, so please, only buy a piece of property if you are sure that you could sustain payments on it if interest rates rise by at least 5 percent. It was not that long ago when mortgage rates were the same as a credit card and current government policies indicate that inflation, and a subsequent rise in interest rates, are a definite possibility.

No comments:

Post a Comment