Friday, March 19, 2010

The Keynesian Malinvestment

The last thing a Keynesian do-gooder wants to see for his pump primed “recovery” is a lot of households saving money.

It’s the antithesis of the desired effects… the goal is to encourage consumption not thrift.

Yet, from early 2008 to early 2009 we experienced a burst of thriftiness the likes of which had not been seen in America in at least 30 years.

It seems the epic financial catastrophe brought some sense to the manic American consumer and served to reinstate a streak of prudence that was once an honored tradition.

But to a Keynesian a penny saved is not a penny earned… it’s simply a penny that is not stimulating economic growth, multiplying and being put to work inducing investment.

In a sense, saved income is malinvestment in the Keynesian mind.

So, as is typical for their sort, Keynesians figure they have both a monetary and fiscal solution to this “problem”.

Simply encourage lower interest rates while simultaneously increasing government spending (deficit or otherwise).

The former forces even the most cautious savers to seek alternative and likely more risky investments as the pain of receiving low or even negative real interest rates outweighs the risks they had sought to avoid by seeking the safety of savings.

The latter, and more underhanded, effectively increases taxes, either today or tomorrow but eventually some saver will have to pay.

Needless to say, with this course of actions implemented as near zero interest rate policy, “tax rebates”, “cash-for-clunkers”, “housing tax credits”, incentives for this and incentives for that the latest generation of Keynesian problem solvers effectively put an end to the trend in personal savings.

The rate went flat in mid 2009 and now appears to be on the decline with the six month moving average dropping from 4.68% to the latest level of 3.88% and the literal level resting at 3.30%.

As Keynesians continue to solve this problem of thrift, one has to wonder how long it will take for sanity to again reemerge as the prevailing trend and what state the economic environment will be in then.