Americans Have No Savings. Thank (in Part) the Fed.
Two weeks ago, during a March 17 address to the nation in response to the COVID-19 outbreak, President Donald Trump asked that Americans work from home, postpone unnecessary travel, and limit social gatherings to no more than 10 people.
And last week, on March 27, Trump signed a stimulus package of over $2 trillion dollars to provide relief to an economy on the precipice of collapse.
The aid package includes handouts and loans to individuals, small businesses, and other distressed industries.
Despite Trump’s allegedly “having created the greatest Economy in the history of our Country” just before the markets tanked, massive and immediate government intervention was the only thing left to forestall a total collapse.
Or so we were told.
So why can’t the greatest economy in the world handle a temporary shock without needing trillions of dollars injected just to stay afloat?
Central banks’ war on savers is one reason.
Using central bank–created fiat money introduces a dilemma. Because of inflationary monetary policy, Americans have long been forced to select from among three undesirable options:
A) Save. Hold the central banks’ paper money and be guaranteed a loss of at least 2 percent in purchasing power every single year (assuming the 2 percent inflation standard).
B) Consume. Spend Federal Reserve notes on immediate goods and services to get the most out of current purchasing power.
C) Speculate. Try to beat the central banks’ planned price inflation, seeking a higher return by investing in higher-risk asset markets.
With businesses and Americans defaulting on their rent and other obligations only days into the collapse, the problem is clear: few have any savings…and why should they, when saving their money at negative real rates of return has been a sucker’s game?
Lack of sound money, or money that doesn’t maintain its purchasing power over time, has discouraged savings while encouraging debt-financed consumption.
American businesses and individuals are so overleveraged that once their income goes away, even briefly, they are often left with no reserves at all.
Meanwhile, small-time savers who can’t get big returns from making high-risk investments have a lot to lose. Although it is true to some that small 2 percent-per-year losses can go easily unnoticed, over just ten years 2 percent price inflation amounts to a loss of nearly 20 percent in purchasing power.
Needless to say, this makes it harder to save and maintain one’s standard of living.
Now, with central banks slashing short-term interest rates even more, and with the Fed moving rates to zero, the dollar has been further destroyed as a method of preserving savings. (And negative nominal interest rates could be coming next.)
Inflationary economic policy, absent the guardrails of sound money, has created a situation with an obvious and deadly conclusion: that many Americans lack savings to protect themselves against downturns.
This situation isn’t necessarily the fault of the people, but rather of a system in which discouraging and punishing savers is a crucial tenet.
The Federal Reserve, the US Treasury, and the White House are trying to reassure the public that everything is “under control,” that “the U.S. economy’s fundamentals are still strong,” and that the economy will skyrocket once COVID-19 is taken care of. What if they’re wrong?