Why Central Banks Are a Threat to Our Savings
The US personal savings rate jumped to 33 percent in April from 12.7 percent in March and 8 percent in April last year. An increase in savings is regarded by popular economics as less expenditure on consumption. Since consumption expenditure is considered as the main driving force of the economy, obviously a rebound in savings, which implies less consumption, cannot be good for economic activity, so it is held. Saving and wealth—what is the relation?
To maintain their life and well-being, individuals require access to consumer goods. An increase in various consumer goods permits an increase in individuals’ living standards. What allows an increase in the production of consumer goods is the maintenance and the enhancement of the infrastructure of an economy. With better infrastructure, a greater quantity and better quality of consumer goods could be generated and more real wealth can be produced.
The enhancement and the maintenance of the infrastructure becomes possible because of the availability of final consumer goods that sustain the various individuals who are busy expanding and maintaining the infrastructure. It is the producers of final consumer goods who pay the various individuals engaged in maintenaning and enhancing the infrastructure. The producers of final consumer goods pay these individuals (i.e., the intermediary producers) out of the saved or unconsumed production of final consumer goods.
Note that when a producer of final consumer goods decides to save more, i.e., to consume less, the fall in his consumption is offset by the increase in the consumption of individuals who are engaged in the intermediary stages of production. This means that overall consumption is not declining because of an increase in saving—as popular thinking has it.
What keeps the flow of economic activity going is the fact that the producers of final consumer goods—the wealth generators—invest part of their wealth in the expansion and maintenance of the production structure. It is this that permits the increase in the production of consumer goods, which in turn makes it possible to increase the consumption of these goods. Out of a greater production of wealth more can be now consumed. So, the motor of the economy is actually not consumption but rather savings.
Since savings enable the production of capital goods, savings are obviously at the heart of the economic growth that raises people’s living standards.
Note that people do not want various means as such, but rather want final consumer goods. In order to sustain themselves people require access to consumer goods. Only once there has been a sufficient increase in the pool of consumer goods can people aim at enhancing their well-being by seeking other thing
Article from Mises Wire