Saving Your Cash is Killing the Economy

What a difference four years can make! In 2012, CNN published an interview with Sheldon Garon, Princeton professor and author of Beyond Our Means. Why America Spends While the World Saves, a how we transformed “from a nation of savers to a nation of consumers.”

Garon explained how we went from being “OK savers” prior to World War II to conscientious savers after the post-Depression creation of the FDIC, which protected the accounts of small savers, as well as patriotically enthusiastic purchasers of savings bonds and war bonds.

But this all changed in the 1980s, after a 1978 Supreme Court decision led to the deregulation of the credit card industry.   Free to charge whatever rate of interest suited their fancy on unpaid balances, Garon says, “[C]redit card firms aggressively expanded their customer base beyond the affluent to target middle and lower income households.”

Customers who in the past would have been rejected as bad credit risks were now wildly profitable.  People who should have been saving found their mailboxes stuffed with what seemed like fast-track tickets to a lifestyle far beyond their means, and non-stop commercials assured them Visa was “everywhere you want to be.”  We were encouraged to imagine ourselves all sorts of places, with all sorts of material goods, we couldn’t actually afford.  But as the bills came due each month, and the balances never seemed to go down, our savings accounts dwindled and died.

As we became accustomed to spending beyond our means, and commercials suggested it was virtually our duty to give our families lifestyles and luxuries we couldn’t afford, along came the home equity loan.  From the 1990s through 2005, we became seduced by the ease with which we could spend even the value of our homes away. Eventually we became the world’s worst savers, spending blindly down the path to recession.

What finally knocked some sense into us?  A long, ugly and very painful Great Recession.  Fast-forward to 2016, and according to an article in the Fiscal Times, America’s found religion again.  We’re back to squeezing our nickels and dimes. Despite income growth, improved employment figures and a seeming stock market comeback, Americans don’t want to spend their money.

The problem is we now find ourselves in a darned-if-you-do, darned-if-you-don’t dilemma.  With our newfound penny-pinching ways, we’ve put the brakes on the economy, reducing our financial engine to a two percent “stall speed,” a repressed level of growth that typically portends a recession.  Each of the last eleven recessions was preceded by that same percentage in real GDP growth, and we’ve been stuck at this rate since 2010.

So forget what your grandmother may have taught you about socking away cash in the bank.  The Federal Reserve has other ideas about what you should do with your money. What Uncle Sam needs is for you to spend your money to help kick-start the economy. To help you along, Fed Chair Janet Yellen told the Senate Banking Committee as recently as last month she wouldn’t rule out saver-penalizing negative interest rates.

We seem to be moving towards quite a choice, then: Hit the malls, or pay the bank to let you keep your money in your savings account.  It’s like seeing a wreck up ahead on the freeway—do you plow ahead, get stuck in a motionless parking lot of other cars, or veer to the off-ramp to find a quicker, more satisfying route to your destination?

Instead of settling for giving up your hard-earned cash fast at the mall, or watching it evaporate slowly but inexorably from your savings, why not actually hold on to it?  My well-known preference for physical gold is based on its liquidity, its retention of value and its undeniable preservation of the buying power of your dollars.

The government and the banks are looking for those with dollars to spend.  That crafty little off-ramp to gold is barely on their radar.  Thus when the Fed achieves its goal and gets people to withdraw their cash from the bank and spend it, gold will protect your wealth, and your retirement, as the economy’s dollar-killing inflation engine starts roaring full steam ahead.