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April 24, 2007 by Gary North, Ph.D.
I first saw Steve Martin perform at the Golden Bear in Huntington Beach. That was in the mid-1960's. He played a bluegrass banjo. He did a comedy routine livened up by making balloon animals. Anyway, that's what I recall. His routines got better, but I still miss the balloons. His video skit is to the point. Americans really are addicted to debt. They cannot come to grips emotionally with the issue of deferred gratification. They have to have stuff now. They refuse to wait. In this, they are just like the United States government. The on-budget (admitted) dent is now approaching $9 trillion. The debt clock is here: The combined Social Security/Medicare debt is well over $65 trillion. So, it is obvious what is going to happen. The government is going to default. The only question is this: In what way? The example set by the government has now been imitated by the general public. Consider the phenomenon of payday loans. PAYDAY LOANS In a recent article on the MSM Money site, Liz Pulliam Weston wrote about payday loans. These loans generate triple-digit interest rates. A payday loan is a loan with pre-paid interest. The borrower gets an advance on his paycheck. The story reported on a truck driver whose car needed a repair. He went to a payday loan company and borrowed $500. He did this by writing a postdated check to the lending company for $575. The problem was, he could not come up with $575 to cover the check two weeks later. He rolled over the loan. And again. Over a period of four years, he paid $23,000 in fees. He did not stop because he caught on. He stopped because he lost his job. He was heavily in debt. To avoid bankruptcy, he had to tell his lenders that he could only afford to pay a small amount. They let him off the hook for most of the interest. But it was very late in the process. It took a year to get the debt paid off. The payday loan transactions were voluntary. But people who consent to such arrangements are short-run people. They have no idea of what rate of interest $75 on a $500 two-week loan is.
Today, there are 22,000 payday lenders. A decade ago, there were 300. This is big business. For comparison, there are 13,000 McDonald's outlets. RESPONSIBLE BORROWING The author began her article with this: "Responsible payday lending" sounds like an oxymoron, and in most cases, it is. How about starting it like this? "Responsible payday borrowing" sounds like an oxymoron, and in most cases, it is. Responsibility has to do with individual action. You do what you want, and you then bear the consequences. But the nanny state doesn't think certain individuals should have to take the consequences. Hence, the nannies pass laws that forbid all irresponsible action -- irresponsible as defined by nannies. Sooner or later the nanny state becomes the ninny state. Ninnies run the bureaucracies. They do stupid things. The United States became a ninny state decades ago. The absurdity of the bureaucratic state today is matched only by the expense. As Forest Gump's mother might have said, "Responsible is as responsible does." I would like to see fewer people get themselves into interest-rate quicksand. But there comes a time when nagging just does not work. Clearly, tax-funded public education has not worked to keep people from accepting irresponsible loans -- a school system built with municipal bonds. If the bureaucrats' schools have failed, why should we trust the bureaucrats' guns? Let's clarify something: Irresponsible debts are accepted by irresponsible people. Irresponsible people don't plan ahead. They don't save. We are back to Steve Martin's skit. The nanny state rests on the presupposition that the state must not allow people to learn from their mistakes. They must instead be prohibited from making mistakes. Result: They make far more mistakes and far worse ones. THE HOUSEHOLD SAVINGS RATE Americans are no longer saving. Net household thrift is now negative. They are going into debt to fund their consumption. It's not just Americans. It's most people living in most industrial nations, except for a few European nations. The only large nations with increases in the savings rate, 2000 to 2005, were Germany and Italy. The Organization for Economic Cooperation and Development, a United Nations outfit, recently published a table listing the annual net household savings rate, 2000-2005, for over two dozen countries. We are seeing a collapse. No other word suffices. Australia went negative in 2002. It was 2.4% in 2000. It was 1.2% in 2001. In 2002, it was .2.3. In 2004, it was -3.7. Canada was 4.8% in 2000. It was 1.2% in 2005. Japan fell from 8.5% to 3.2% by 2004. Korea fell from 10.7% to 4.4% in 2005. Switzerland fell from 13.2% to 9.1% -- not a collapse, but these are the Swiss! England went from 0.5% in 2000 to -.10% in 2005. The United States fell from 2.4% on 2000, and 2.4% in 2003 to -.4% in 2005. The West's industrial nations' populations, outside of a half a dozen European countries, have decided that they do not need to save. They have, at long last, adopted the anti-savings mentality of John Maynard Keynes. They assume that something other than deferred gratification will take care of them in their old age and pass on a growing legacy to their children. CAPITAL CONSUMPTION You can and should discipline yourself to invest at least 10% of your after-tax income every month. Do not break this rule. You need savings. But if you did this all alone, you would find yourself increasingly impoverished. The refusal on the part of Western residents to save will lead to the consumption of capital. As capital is depleted, people's living standards will fall. The thrifty person does better in a declining economy than a spendthrift does, but he cannot single handedly overcome the effects of capital consumption by an entire civilization. Of course, there are other sources of saving. Businesses invest. This is called "retained earnings." Businesses must not only replace aging capital, they must provide money for research and development. If they don't, they will not survive. In 2000, American companies invested $1.16 trillion. In 2004, this was down to 1.05 trillion. This was gross investment. It included capital replacement. These figures are not discounted for price inflation. So, investment is visibly falling. The problem is the mindset of the masses. People in general are deferring to others -- state bureaucrats, central bankers, and businessmen -- the responsibility of thinking about how old people will be supported in the future. They expect these other groups to defer gratification. This is a vain hope with respect to bureaucrats and central bankers. WHAT IS THE SOLUTION? The solution is simple to state and virtually impossible to implement. People must become more future oriented. They must not discount the future with a high rate. As Ludwig von Mises would say, people must adopt lower time preference. This is not accomplished by passing a law. Future orientation is affected by religious views, time perspective, personal responsibility for one's future, commitment to future generations, confidence in government-run old age assistance programs, and confidence that the government will not tax away people's gains. Here is the essence of the religion of high time preference:
There is nothing that you and I can do to change other people's time perspective, beyond preaching and nagging, neither of which work well. So, we must begin where we have legitimate authority: with ourselves. Change begins with an army of one. CONCLUSION We are seeing the erosion of capital in the West. It stems from a new sense of time -- present oriented -- and a new sense of personal responsibility: lower. The Keynesian mindset is now upon us: a commitment to spending rather than thrift. Ironically, thirty years after Keynesian economic theory was sunk by the twin icebergs of stagnation and price inflation, the chief idea of Keynes has triumphed: faith in the power of spending, even debt-funded spending. Someone is loaning the money. The big lenders today are central banks. But they do not generate capital. They merely reallocate it. The central banks create fiat digital money and lend it. This creates the boom-bust cycle. We have had a great boom. To correct for misallocated loans, we must have a great bust. This is politically unlikely. There is always more fiat digital money where that came from. My advice: Do not become dependent on promises of future income: from the government, from your pension fund management, or from your corporate pension plan's administrators.
Dr. Gary North earned a Ph.D. in history and is one of America's keenest economic analysts and commentators. He supports the Austrian school of economics and is a previous assistant to libertarian congressman Dr. Ron Paul. Visit his website at http://garynorth.com. To subscribe to Gary North's Reality Check go to http://www.dailyreckoning.com/sub/GetReality.cfm If you enjoyed this essay and would like to read more of Gary's writing please visit his website at http://www.garynorth.com or http://www.freebooks.com
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Resource Center Main Page & Index |
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It's
really very simple. Most Americans don't believe
this. They need to watch Steve Martin's comedy
sketch. It outlines the strategy perfectly.
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