Open Season on Savers

Austrian economist Ludwig von Mises called it time preference.  That is, the assumption that, all else being equal, people prefer attainment of a given end sooner rather than later.  People prefer present satisfaction over future satisfaction.

These days’ people’s time preference is instant.  They want instant gratification.  Mises called this high time preference.

Obviously, the discipline of saving and investing doesn’t conform to such a high time preference.  Nonetheless, people also want more…lots more.  More stuff, nicer, things, a bigger house, exotic vacations.

But to enjoy greater consumption, people must first produce.  The cost of production takes time.  It also takes sacrifice.  Mises called the willingness to sacrifice present consumption for greater future consumption, a low time preference.  The result of having a low time preference is increased savings.

Low time preference people (i.e. savers), are critical to the process of wealth generation and the strength of capital markets.  Without them money would be instantly spent and capital would not be available to improve production.  Businesses would not have the credit needed to expand operations and develop new markets.

Improving Upon the Business Cycle

Mises also recognized that the expansion of bank credit produces distortions in the economy.  The additional flow of credit based money, pyramided off of savings deposits, makes it appear that more means exist for current production than are actually sustainable.  The economy puts the credit to use and a boom ensues.

Businesses take the false signals of the stimulated demand and adjust their production to meet it.  Sometimes a mania follows.  Yet, eventually, the whole economy becomes overextended and the economic boom turns to bust.

The bust part of the cycle, while disruptive, is healthy for the economy.  It keeps the economy and financial system in check.  The bust keeps the economy from getting too far ahead of the capital base.  It corrects the mistakes and malinvestments of the boom.

Central bankers, however, think they can improve upon the business cycle.  They want day without night.  They want spring without winter.  They want yang without yin.  They want consumption without sacrifice.  What we mean is they want boom without bust.

Once bankers have extended credit to too many people to pursue ventures that should never have been undertaken, central bankers step in and bailout the bankers.  Massive amounts of loans go bad, yet the banks stay in business.

In the United States, the Federal Reserve gives the banks money for practically free.  The banks, in turn, loan it to the government in the form of Treasury purchases.  The banks collect the spread and recapitalize their balance sheets.  On the surface, there appears to be no consequences…

But there are consequences…

Open Season on Savers

If you hadn’t noticed, it’s open season on savers…and not just in Cyprus.  Here in the U.S. savers are being hunted like wild boar.  They don’t stand a chance.

For example, the Fed’s pushed the yield on the 10-Year Treasury note below the rate of inflation.  This means Treasuries are certificates of guaranteed confiscation.  Moreover, when rates begin to rise, Treasury investors will be completely shredded.

Certificates of deposit are a disaster too.  A 12-month CD from Bank of America is currently paying 0.2 percent annually.  The consumer price index over the last 12-months is up 2 percent.  That means a CD pays a negative real yield of 1.8 percent.

Then there’s the downright disgraceful yield from savings accounts.  A regular savings account from Bank of America currently pays an annual yield of 0.01 percent.  After inflation, the loss from keeping money in the bank is nearly as bad as stuffing it in the mattress.

Yes, savers are under assault.  Unfortunately, those with low time preference are being punished for their prudence.  They are being robbed of their time.

Remember, savers don’t just save money so that they can consume more stuff in the future.  They sacrifice their time so they may have greater freedom in the future.  They do so not for greed but for independence.

If you trade your time for dollars you know what it’s like.  You must do things you’d rather not do, to serve people you’d rather not serve, all for the reward of a paycheck.  Day after day…year after year…this exhausts ones soul.

Rather than spend time with your family, you must meet clients who disgust you.  Rather than travel for recreation, you must travel to meet with corporate officers who want to further squeeze you.  Rather than sitting down to read a stimulating book, you must read monotonous reports.  Rather than create something exciting and interesting, you must prepare schedules and budgets…and work like crazy not to overrun them.

No doubt, there’re plenty of other things you’d rather do with your time and your life.  But you endeavor, and save, so that in the future you have the freedom to do what you want.  You see, savings doesn’t merely represent future consumption.  It represents past sacrifices made and time traded to accumulate it.

So when the Federal Reserve inflates the money supply and the Treasury devalues the dollar, not only are they covertly stealing money from your bank account…they’re stealing your property, your freedom, and your time.

In other words, they’re stealing your life.


MN Gordon
for Economic Prism

Return from Open Season on Savers to Economic Prism

This entry was posted in Inflation, MN Gordon and tagged , , , , , , . Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.