So the US Savings rate goes up and Investors are worried? What is wrong with this picture? I understand that our economy is a consumer driven one, but seriously? Have we not learned anything about what excessive debt and living beyond our means does? I've written a lot this week on economic law and how violations of that law undermine our free market society. In this instance this story is suggesting that we are mad about one of the fundamental economic laws being followed. Specifically, in a capitalist/free market economy, individuals must be able to control capital and savings. This is required because it is necessary to defer consumption in order to further economic development.
Here's an example:
You're stranded on a desert island and all there is to eat is fish. Since all there is for food is fish, you quickly learn that in order to survive you must fish nearly all day. You must work all day because on your particular island you can only capture 3 fish a day because you don't have a net. This goes on for a while, but the quality of your life is miserable. You end up spending all of your daylight hours catching fish just in order to survive and you can't really accomplish anything else. As a result of your situation you are unable to get out of the sun or think through ways to get off the island. You have no time to build a proper shelter and you'd like a net to catch more fish. Although you know these things are important, you can't create them during the day since your fishing. You know that eventually you want to get off the island, improve the quality of your life, and stop fishing and realize you're going to have to free up some of your time to do so. You decide the only way to free up time is to find a more efficient solution with regard to your fishing situation. So, in order to get a shelter, you must first make a net since building a shelter will take a week. However, in order to make a net you have to forgo eating one of your 3 fish for 3 days. By doing this you are able to save up an entire day's worth of food so you can build your net on that day instead of fishing. By doing this you have deferred consumption, saved your fish, and created added value by creating the net. This will eventually get you a shelter because the net can capture 10 fish a day and so on and so forth.
Understanding this very basic example quickly illustrates the glaring problems in not having an individual savings rate. For innovation to occur, and for real economic growth to be established, some level of deferred consumption must exist. As you can see with what has happened in the US over the last 2 to 3 years, the world can ill afford to live beyond its means. We cannot afford to have a savings rate that is near zero or (yes, this is true) one that is below zero on occasion in the United States. As the old saying goes:
"If you give a man a fish you feed him for a day. If you teach a man to fish, you feed him for a lifetime."
And today we'll add...
"If you teach a man how to save his fish he'll make a net and eventually get off the island."
