The False Choice between Spending and Saving

Market commentators and political talking heads find themselves in a pickle these days given that strange cops like Jon Stewart have surfaced. So they are watching what they say and the dilemma is how to ask people to spend money to stimulate the economy and at the same time talk about the reckless living that got us into trouble in the first place. While it is entertaining to see Obama and his staff balance the politics of sounding responsible and encouraging spending at the same time, I don't think this dance is needed.

Just ask people to save and that will stimulate the economy just as well if not better. Let's take a closer look at what saving does. Assuming we are not going to the mattresses yet, a basic saving act is to fund your checking account. So what does this do? It capitalizes your bank. Your bank has more assets. When banks have more assets, inter-bank lending rate goes down. When these rates go down banks are getting money for cheap so they are willing to lend for cheap and interest rates on loans go down. Given a 10 to 1 reserve ratio, the banks can lend out 10 times what you gave them. When this happens investors and entrepreneurs who have worthwhile projects capitalize on the availability of money at low interest rates and execute their projects. These projects create jobs. These jobs create income and this income creates the spending that you want. It’s all about jobs. If people feel safe in their job or see availability of jobs they are going to spend.

This kind of stimulation I would argue is better than "spend baby spend". Spending rebate checks has only intrinsic value. It has no time value and it does not leverage the 10% reserve ratio. On the other hand, saving grows the economy for all by making the pie larger. I'm convinced that despite all the spend talk, savings will grow. Bank deposits are showing growth and at some point two things will happen. First, banks will look more profitable and people will start buying Financial stocks again and secondly, banks will lose the fear of being able to raise capital and will start lending more freely.

So, let's in no way delude ourselves that by saving we are hurting the economy. Take that check to the bank. It’s good for you, it’s good for everybody.