Phil Kurpen of Americans for Prosperity posted this little ditty on the Fox News Blog (yes, I'm trolling) today arguing simply that the way out of the current crisis is to increase the savings rate, because it's the debt itself that is the problem. The argument is that the current standard of living is built on unsustainable, and generally bad-for-us debt and we should all just stop spending and save our money instead and this whole problem would go away, because, it's a just a big Ponzi scheme anway.
What's a big Ponzi scheme? I'm not sure, and I don't think he really knows either, but aparently Bernanke, Paulson, Obama and Bush are all in on it. However, it's a very timely reference, as is the reference to Maddoff, as irrelevant as they are. The problem is that in a Ponzi scheme, someone is actually skimming the money from the top, which why it always fails Mr. Kurpen fails to show how this is so.
Regardless let's consider this proposal. We are currently in a recession brought on by the banking crisis (and probably some other stuff too, but let's keep it simple for now). The banks stop lending, so consumers and businesses that use credit for big-ticket items can no longer get that credit for those goods. As sales drop, businesses adjust and start to lay people off and invoke salary freezes and in some cases salary cuts. People become nervous for their jobs, and start to save money by scrimping. Businesses see this pullback and a new wave of layoffs occurs, and/or different industries are effected. This is a recession. It's self- propagating. Businesses cut back in response to consumers and vice versa. As a result of this process, the economy actually shrinks.
There is a point below which the economy won't shrink (theoretically) but since the US is a service economy now and no longer a manufacturing economy, our economy could take quite a pounding before it reaches some level where the recession stops (note that I did not say equallibrium). I'm not sure that anyone really wants to find out where that is; (some may say they do, they clearly have not thought it through) we would call that a depression.
Given this scenario, how does saving money effect this process? IT WOULD MAKE IT WORSE! Removing additional money from the economy by saving will simply make the recession worse. Now the supply-siders will come back and say that the additional savings will allow the banks and businesses to invest that money. However the argument fails on its face for two reasons: First there is nothing that guarantees that the banks will loan the money when they get their hands on it (as Paulson found out to his dismay). Second, for every dollar saved, at least one dollar is removed from the economy. Businesses rely on dollars that are in the economy, not in banks, beause if it's in the consumer's bank account they are not out spending it on goods and services.
So let's all just think twice when we hear this type of simplistic thinking. I've been hearing it a bit lately, as it seems to be quite popular with the more conservative Republican crowd as a way to take the Obama administration to task. Just say "No" to this type of thinking.
What's a big Ponzi scheme? I'm not sure, and I don't think he really knows either, but aparently Bernanke, Paulson, Obama and Bush are all in on it. However, it's a very timely reference, as is the reference to Maddoff, as irrelevant as they are. The problem is that in a Ponzi scheme, someone is actually skimming the money from the top, which why it always fails Mr. Kurpen fails to show how this is so.
Regardless let's consider this proposal. We are currently in a recession brought on by the banking crisis (and probably some other stuff too, but let's keep it simple for now). The banks stop lending, so consumers and businesses that use credit for big-ticket items can no longer get that credit for those goods. As sales drop, businesses adjust and start to lay people off and invoke salary freezes and in some cases salary cuts. People become nervous for their jobs, and start to save money by scrimping. Businesses see this pullback and a new wave of layoffs occurs, and/or different industries are effected. This is a recession. It's self- propagating. Businesses cut back in response to consumers and vice versa. As a result of this process, the economy actually shrinks.
There is a point below which the economy won't shrink (theoretically) but since the US is a service economy now and no longer a manufacturing economy, our economy could take quite a pounding before it reaches some level where the recession stops (note that I did not say equallibrium). I'm not sure that anyone really wants to find out where that is; (some may say they do, they clearly have not thought it through) we would call that a depression.
Given this scenario, how does saving money effect this process? IT WOULD MAKE IT WORSE! Removing additional money from the economy by saving will simply make the recession worse. Now the supply-siders will come back and say that the additional savings will allow the banks and businesses to invest that money. However the argument fails on its face for two reasons: First there is nothing that guarantees that the banks will loan the money when they get their hands on it (as Paulson found out to his dismay). Second, for every dollar saved, at least one dollar is removed from the economy. Businesses rely on dollars that are in the economy, not in banks, beause if it's in the consumer's bank account they are not out spending it on goods and services.
So let's all just think twice when we hear this type of simplistic thinking. I've been hearing it a bit lately, as it seems to be quite popular with the more conservative Republican crowd as a way to take the Obama administration to task. Just say "No" to this type of thinking.
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