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Why savings are more important than debt in a successful economy.

04 May 2020

Written by Ralph Hazell

Savings

Our current monetary system discourages savings by offering nearly zero (or in some cases negative) interest rates and at the same time the system encourages debt. The ability to access debt seems to be more important than your ability to earn money and save. Free money in the form of zero interest loans (or bailouts!) are an economic distortion that will look good in the short term but bad in the long run.

Why is it that our media and political leaders refuse to have a debate about the Philosophy of money? It seems that the language used to describe money is deliberately confusing, as if our leaders are saying to us that we shouldn’t worry ourselves with this complicated business of money and enough money will be printed to take care of everything.

Regular people are starting to ask common sense questions on where all this money is going to come from.

As an individual you build your wealth by creating a surplus in the value of your earnings from whatever it is you do for a living. If savings are to be held in money, then not only should the financial reward for hard work be worthwhile but also your savings in years to come, when you may want to access them, should reflect the hard work that was put in to earn that surplus and therefore not lose its purchasing power.

The better the system of exchange and savings works, the more balanced and prosperous society can become. The surplus of production, held in savings, can then be invested in enterprises to try and increase the future value of that person’ savings. Noting a saver and investor can be different, an investment should only be possible by putting to work the savings achieved through hard work.

This is where our financial system seems to go a bit crazy. Investments in debt or equity should only be possible with the equivalent savings having been made somewhere by someone. This is quite a logical argument. But we seem to have a situation where there is a lot more debt in the world than there are savings. Many western countries' government debt is greater than 100% of GDP, doesn’t that mean they should be bankrupt?

Our system of banking and money creates debt that doesn’t have equivalent savings that have been earned. This leads to an overweight and over leveraged financial system that is not only extremely volatile but also does not effectively reward people for being sensible and working hard and saving money.

Just last week the Federal reserve expanded its asset base by $205 billion to a total of $6.573 Trillion and governments all around the world are creating vast amounts of new money. Arguably, the recent increase in new money is for a good cause. But you still have to ask the questions - how can this money be created so easily? Where has it come from? Will it be paid back?

This is why we need a system of sound money that encourages savings, and that is accountable not just to the government but also the people that use it.