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Neo-classical
economists underestimate the importance of the link between savings and
investment. The two should be regarded as linked together: you need savings
to be available for investment in new production for the future.
This causes
no concern to mainstream economists. Instead they advocate that savings
should support government spending, rather than paying down consumer debt.
They regard the second option as recessionary folly. Meanwhile they believe
investment can be stimulated through low interest rates with a helping hand
from government. The effect of our current predicament in most advanced
economies has been to separate savings from industrial investment. This is
unwise.
Healthy
economies depend on the right mix of consumer demand and capital investment.
You can carry on with the provision of currently available goods and services
only to a degree, and a business that neglects capital investment will simply
lose sales at a rate that increases with time. It must continually invest in
new and improved production, a process that can be delayed in the face of
short-term uncertainty, but never abandoned. However, instead of being
available to fund productive investment, the necessary savings are being
diverted to finance government deficits, so are being extinguished in current
spending. This is the Keynesian preference to savings being invested in
future production to produce sustainable returns.
Those that
think this is only the result of our circumstances are being overly generous.
It is the direct intervention recommended by Keynes no less, in his General
Theory of Employment, Interest and Money. At the end of Chapter 12 he
writes, “I expect to see the State…taking an ever greater
responsibility for directly organising
investment…” Indeed, interventionist governments have always been
ready to do just that. But instead of interposing themselves between saver
and industry, their deficits now absorb more than embattled savers can
provide.
Central
banks are replacing these savings with low-cost new money, but are surprised
that private investment remains depressed. They think the only criteria for
investment is cost of borrowing. This is because governments, in common with
their economic advisors, can only understand the economy as it is. In other
words they are working from static assumptions. But static economies, like
businesses that neglect their capital investment, gradually wither away. This
was the basic experience of communism. The reason an economy progresses is
because it is dynamic: consumers constantly seek new satisfactions and
entrepreneurs try to anticipate them. And if you tell an over-taxed consumer
to mortgage his future to the government, no one should be surprised if the
dynamism of an economy withers on the vine.
So long as
governments think they can replace genuine savings with an increase in the
quantities of money and credit, they are ensuring no economic progress. Any
evidence of economic growth is statistical only, reflecting the creation of
extra money by the state; but a GDP number that is puffed up by newly-issued
fiat currency should not be confused with a stagnant economy.
The
conclusion is simple: there is no salvation in supporting a static economy at
the expense of the dynamic laissez-faire alternative.
Originally
published by
Goldmoney
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