The Federal Reserve Has Destroyed the Meaning of Saving
by Eric Englund
For those who understand the dangers of central banking, it
should not come as a surprise that the Federal Reserve?s
systematic debasement of the dollar has also led to the
debasement of our language (in this case, the very meaning of
saving). In turn, the debasement of our language has led to
dangerous financial behavior on the part of the common man.
What is at risk here is more than our savings and capital
formation. Nothing less than liberty is at stake here. Let me
explain.
In a free-market society (which would include a 100% gold
dollar), a natural tendency would be for the prices of goods
and services to decrease over time. The beauty of a gold dollar
is that, conversely, its purchasing power would increase over
time. Therefore, setting aside part of one?s money income (as
savings) would be an attractive proposition for two key
reasons. First, as mentioned above, the purchasing power of
money would increase over time, thus rewarding savings.
Secondly, a bank would pay the saver interest which is an
additional reward for saving. Clearly, having a 100% gold
dollar would provide an economic environment conducive to
saving.
Since the establishment of the Federal Reserve, in 1913, the
U.S. dollar has lost over 95% of its purchasing power. Hence,
it is not surprising that the Federal Reserve?s reckless
inflation has led to the common man?s expectation for the
dollar to lose value over time. As the Federal Reserve
intensifies the rate at which it creates money out of thin air,
the common man?s behavior (in the sphere of personal finance)
tends to change for the worse. He is led to speculate in
response to a constantly depreciating currency.
With the expectation for money to lose value over time, there
is a tendency for people to seek higher rates of return than
offered by passbook savings accounts, certificates of deposit,
and other savings vehicles. During particularly acute periods
of money creation by the Federal Reserve (in the 1920s and the
1990s for example), the common man turned to the stock market
in search of higher rates of return. However, it is clear that
the common man does not understand that his behavior had
changed from being a saver to becoming a speculator. Herein
lies the key as to how the debasement of our currency has led
to the debasement of our language (i.e. eliminating the word
"speculation" from Wall Street?s vernacular and ultimately
replacing it with "saving").
As a quick aside, it is crucial to understand that investing is
spending, and thus the opposite of saving. Therefore,
speculating falls into the category of spending as well
(perhaps reckless spending would be a better description).
The corruption of what it means to save occurred incrementally.
The first step was to eliminate the distinction between
"investment" and "speculation" in common stocks. In Benjamin
Graham and David L. Dodd?s classic textbook Security Analysis,
the authors point out that: "An investment operation is one
which, upon thorough analysis, promises safety of principal and
an adequate return. Operations not meeting these requirements
are speculative." Most Americans are economically illiterate
(thanks largely to public schools) and most certainly cannot
perform basic security analysis such as reading (and
understanding) a company?s balance sheet and income statement
(which a true investor should be able to do). However, Wall
Street knows that people do not want to be called speculators
even though most individual investors really are. On this
point, Benjamin Graham stated (in his wonderful book The
Intelligent Investor): "?in the very easy language of Wall
Street, everyone who buys or sells a security has become an
investor regardless of what he buys, or for what purpose, or at
what price, or whether for cash or on margin." Indeed, Benjamin
Graham was on to something here. The corruption of our language
can lead to reckless behavior on the part of the common man
(i.e. speculating in the name of investing). In the same book,
Mr. Graham conveyed the following warning: "The distinction
between investment and speculation has always been a useful one
and its disappearance is a cause for concern. We have often
said that Wall Street as an institution would be well advised
to reinstate this distinction and to emphasize it in all its
dealings with the public. Otherwise the stock exchanges may
some day be blamed for heavy losses, which those who suffered
them had not been properly warned against." Unfortunately for
Wall Street and the ill-educated common man, Graham and Dodd?s
wise words have fallen upon deaf ears.
With the advent of the Individual Retirement Account (IRA), the
401K, the Keogh Plan, and Thrift Incentive Plans, came a
further corruption of our language. All of these aforementioned
investment (speculation) vehicles have been broadly mislabeled
as retirement savings accounts. In talking to acquaintances,
colleagues, friends, and family, it is disturbing to
consistently find that people think that simply putting aside a
portion of current income, to purchase common stocks and mutual
funds (for a retirement savings account), is the same thing as
saving. I know individuals who have purchased high-tech mutual
funds, aggressive growth funds (and specific stocks such as
Amazon.com and Cisco Systems) for their retirement savings
accounts. To a person, each one believed that foregoing current
consumption to speculate (by Graham and Dodd?s accurate
definition) was equivalent to saving. Heck, the meaning of
saving has been so debased that some people even believe that
paying down mortgage debt is a form of saving. Indeed, Wall
Street and its federal watchdog (the Securities and Exchange
Commission) absolutely refuse to use the word speculation in
its proper context. Instead, we now call speculation "saving".
Thus, the debasement of the incredibly important word (saving)
has become complete (save for the adherents of Austrian
economics).
How did the problem of speculation, in internet stocks, tech
stocks, and other common stocks, reach such massive
proportions? We do know that the Federal Reserve created
massive amounts of money after the Long Term Capital Management
fiasco (in 1998), and inflated further (in early 1999) in
anticipation of a Y2K disaster (thus providing the liquidity
for rampant stock speculation). Moreover, as should be clear by
now, the meaning of the word saving has been corrupted to the
point that sheer speculation has become the path to safety,
comfort, and personal welfare in the present, and in one?s
retirement years. So, once again, how has the problem of
speculation, in common stocks, occurred on such a massive
scale? Ludwig von Mises provides an answer in has magnum opus
Human Action. He states (on page 46 of The Scholar?s Edition):
Common man does not speculate about the great problems. With
regard to them he relies upon other people?s authority, he
behaves as "every decent fellow must behave," he is like a
sheep in the herd. It is precisely this intellectual inertia
that characterizes a man as a common man. Yet the common man
does choose. He chooses to adopt traditional patterns or
patterns adopted by other people because he is convinced that
this procedure is best fitted to achieve his own welfare. And
he is ready to change his ideology and consequently his mode of
action whenever he becomes convinced that this would better
serve his own interests.
Undoubtedly, millions of Americans followed the herd into the
stock market seeking the "selfish" interest of financial
security (convinced that his money was safe as long as he was
in the stock market for the long term). The common man has been
duped, by our corrupted language, into speculating in the name
of saving. Indeed, an economic environment, dominated by an
ever-depreciating currency (thanks to the Federal Reserve), can
lead to the corruption of our language and to risky financial
behavior on the part of the common man.
With the economy clearly weakening and the fiat money, jet-
fuelled ride on the stock market plummeting back to earth,
Americans are becoming quite concerned about their "savings".
To quell these concerns, brokers (such as Charles Schwab) are
running ad campaigns to soothe brokerage customers? nerves with
the irresponsible platitude that your money is safe, in the
stock market, as long as you are in it for the long term (sound
familiar?). Just relax, Alan Greenspan?s seven interest rate
cuts in 2001 will come to the rescue. All will be well.
As the three major stock indices (the Dow Jones Industrials,
the S&P 500, and the NASDAQ) regress back to their respective
means, much further financial pain lies ahead for Americans.
With such pain inevitably comes calls for government action.
Perhaps the Federal Reserve will incrementally cut short-term
interest rates to 0% (just look at Japan). Perhaps large
brokerage houses will have to be bailed out at taxpayer expense
(does this smell like a justification for tax hikes?). In the
event the economy busts into a deep depression, be assured that
another "new deal" type of scheme will be hatched in
Washington, D.C. All of this will come at the expense of
further eroding our liberty.
So here is a quick summary. In the pernicious economic
environment created by the Federal Reserve?s continuous
debasement of our money, it is clear that a simple, yet
crucial, word such as "saving" can literally lose its meaning.
In turn, it is apparent that Americans have speculated in the
name of saving. This can only lead to economic disaster, more
government intervention, and eventually, loss of liberty.
F.A. Hayek understood the extreme danger of corrupting our
language. In The Fatal Conceit: The Errors of Socialism, Hayek
dedicated an entire chapter (titled "Our Poisoned Language") to
this topic. He opened this chapter with a chilling quote from
Confucius: "When words lose their meaning people will lose
their liberty." Debasing the very meaning of saving may prove
to be a crippling blow to our free-market society and, thus,
our liberty. For this we can lay the blame at the doorstep of
the Federal Reserve and its inflationary policies.
lewrockwell.com |
