A Discussion About Savings
by Michael Storm Tippets
[Michael Storm Tippet's article about savings is followed by a discussion between him and Ari Armstrong.]
Michael Storm Tippetts -- July 27
Success through Economic Understanding: Savings
The 90's lied to everyone. If you invested in the tech boom, and lost, you know what I mean. If you won, then you lucked out, congratulations! Or you were one of the purveyors of the lies, then shame on you. We all know by now what the lies were, we've seen the fallout in the demise of uncountable tech companies, and the consequence continues today with Enrons and World-Coms. What most don't know is that prevailing, backwards, economic thought about personal savings exacerbated the situation. Foregoing a long winded conversation on economic thought, let me state that the only money not working for the economy is money that is stashed between mattresses, lost in seat cushions and never spent.
The mal-investments of the 90's had -- at least -- a two-fold effect on personal savings. First was the literal effect of depleting the savings of millions of American and foreign investors. Second, and arguably most egregious, was the devastation to the basic idea that savings was an important part of our financial planning, and an equally important factor in the over-all economy; not only of America, but of the world.
Since 1990 Americas have spent what was somewhere around 9 billion dollars in savings. If you can't wrap your brain around that number, try this, smaller, equally mind-numbing, number: According to the NPA, Americans now have a growing savings debt of more than 1 billion dollars. That leaves little reason to question why Chairman Greenspan would say 96% of us will require the financial assistance of someone else in our old age. The most likely candidate for footing that bill is of course the Federal Government (translated: every tax payer), and with a deficit predicted for this year and no end in sight to the expansion of government, hence mounting future deficits, it isn't likely that they'll (we'll) have the money.
Empty Investment, Empty Wallet, Empty Savings Account
The 90's showed a massive increase in 'prospecting' the likes of which had not been witnessed since the 1840's (and the smartest still went looking for gold, my investing tip to you). From comic books with multiple foil embossed covers and cross-over stories (Superman meets Spider-Man) to IPOs, Hostile Takeover Bids and Fly-By-Nights with vaporous products; investors were throwing money at anything that even remotely offered the prospect of fast growth and a quick return (or at least not too long a ride with a larger return). Even the most valuable and highly sought after comic books have been obtainable, in my time, by the average person who really wanted one. Compare: the prices of Action Comics #1 -- the first appearance of Superman -- in 1973 at roughly $18,000, to today's price of nearly half-a-million, a no-brainer investment. Have you heard that before? Did I just compare apples to nuts?
Business and investing rarely offer the obvious advantage of knowing that, baring the ultimate in neglect or disaster, your investment is secure. And they never offer that kind of guaranteed return! Yet all through the 90's we were sold on the idea that saving wouldn't keep the economy growing at the pace it was -- spending would, the more the better. The quickest way to get your share was to catch the fast train on the markets that were experiencing a natural growth, in line with the growth of the technology sector. That natural growth would, as the decade advanced, be disturbed by Fed intervention, and mal-investment resulting in failure of the natural market process to quickly and correctly weed out the bunk investments. This does nothing for those who have already lost, but neither did Fed intervention. It graciously does not prolong the agony; Fed intervention does and still is. The market has yet to recover from the instability and is still un-naturally sustaining the bust that completes the boom; manipulated boom or not. The Fed continues to adjust rates, to head off a natural deflation, encouraging credit expansion where savings didn't or no longer exists. Now near zero, rates are like those of Japan whose economy has been on a steady decline for over a decade.
Just like the comic book prospectors of the time, investors bought promotional glitz at the sacrifice of substance, and false financial security at the sacrifice of reason, and ultimately our savings. With famous and infamous tales of horror suffered at the hands of fleeting ideas and non-existent products littering the waste-land of 90's investment lore; there is no reason to investigate or question further the substance of those investments. But what reasoning is it that justifies gambling your health and wellbeing in such a manner? The same kind of reasoning that says your 90's holographic cover comic --m with millions in print and everyone thinking just as you do -- will ever hope to reach the value of an Action Comics #1. Even seeing past the obvious difference in supply and demand, Action Comics #1 was the beginning of a defining age for comic books, just as Microsoft was to home computers. Not one person in 1938 bought Action Comics #1 hoping that it would secure their financial future. That would be just like investing all your savings in an IPO. Microsofts and Supermen don't come along often, or even when the odds favor them.
I'm not suggesting that investment is bad, only that blind market driven investment like we experienced in the 90's (and continue to suffer from today) is. It destroys savings. Savings is the key to all investment; the money spent to finance the boom of the 90's had to come from somewhere; and most of it came at the sacrifice of savings. The rest came at the price of credit, which only makes it harder to save in the future. People invest when they have set aside (saved) money that they would otherwise spend on something other than life's necessities. People mal-invest when they sacrifice all savings, and then borrow to keep betting. Without savings there can be no fruitful capital investment, neither can you have an immediate return, because you have to gain enough return to pay off the (credit) debt before you get your cut.
Savings is a hedge against an unknown future -- In case "it" happens. With the recent competition brewing between banks for your savings, there has never been a better time to begin saving. A well managed savings can net the individual up to ten percent, even more, in returns each year. Not many stocks offer that kind of return year after year and none offer the security of savings.
Your savings speaks for you as a person; it says to others that you accept responsibility for your own life and that you will not leave your future to chance, any more than it already is, and the process of creating a savings gives one a positive sense of control over their lives. I would finally submit that savings is important if for no other reason than it is utterly foolish to rely on the chance, charity, or subsidy of someone else -- no matter how well intentioned -- to provide for your well-being. Even if they did, by virtue of that gift, does it not stand to reason that the giver would have the final say in the care you can receive, who you receive care from, and to what value is attributed the care options available to you?
Ari Armstrong -- July 31
Thanks for your notes.
However, you seem to be drawing a distinction between "investments" and "savings." This distinction is untenable. We can distinguish between wise and foolish investments (obviously the former is preferable), and we can distinguish between risky and safe investments. You seem to be arguing in favor of safe investments, though there is such a thing as a wise, risky investment.
I would be more comfortable running the essay if you made the lines of argument a little clearer.
Michael Storm Tippets -- July 31
Thank you for your comments. If I can trouble you to offer more?
I'm sure you have plenty to do but your feedback is important, and I'm not entirely clear from your response as to why it is you believe I've not conveyed enough distinction between the two.
Without sounding like an economist, and delving into the arguments about what constitutes savings, or getting too lost in graphs, charts and theorems; I thought I made a good case for savings based on recent historical occurrences. In doing so I made sure not to categorically dismiss the idea of investment.
Ari Armstrong -- July 31
There's no need to include charts or graphs in order to recognize there's no fundamental distinction between "savings" and "investment." What you seem to be arguing in favor of is sticking your money in a bank account, as opposed to sticking your money in stocks. But all banks do is loan your money to other businesses; i.e., invest it. Stocks are just a particular form of investment. (Of course, Murray Rothbard argues banks should *really* save your money; that is, stick your gold in a vault for a fee, which means you get negative returns. But this is roughly equivalent to sticking money in a mattress, which you seem to disfavor.)
The reason bank accounts are less risky is because a) banks make safer loans and b) the FDIC (a government program) insures the losses of bank accounts. In general, there is a trade-off between risk and returns. That's why it can be wise to make a risky investment (as long as one has a realistic sense of what the risks and potential returns are).
The fact that *some* stocks were invested in stupidly and *some* businesses lied is not an argument against investing in all stocks; it's an argument for investing in stocks prudently. Someone who wants to invest for the long haul may well decide to invest in stocks. Of course, some people believe the economy is about to tank, in which case it would be prudent *not* to invest in stocks (and also *not* to keep money in a bank account, due to coming inflation), but rather to, say, buy gold or other hard assets. But that's a rather different argument than the one you seem to be making.
Michael Storm Tippets -- July 31
It is good to know that it's not a lack of message or means on my part, per-se, so much as it is that you make no distinction between savings and investment. An economic argument, the likes of which are my desired goal.
You and I both understand that our best bet in all cases is to keep and spend money without the involvement of government, or FDIC banks, or anyone else but the parties making voluntary exchanges, but we have a better all around (global) economic understanding.
Until everyone else has a like understanding, which may never happen, one of the best things I think we can do is tell others that there are better ways to handle their fiat. To say that there is no distinction between the risk of capital investment and savings goes too far for most people. They have a hard enough time balancing a check book. My stated goal, in so many words, is to convince them to be smarter with money, particularly what we generically call savings, so that they are less likely to become another (bigger) link in the growing chain of welfare and subsidy. I did not set out to define savings and investment because to reach my point would require that I trace both to the source, show the direct fed intervention on each, and a short article would quickly become economics 101. I certainly can walk and talk a deeper economic line, but that destination and language has a distinct audience. Though I would not want to alienate those in the minority, it is the thinking of the majority that I am working to change. I believe that requires a subtlety and language that slowly seeps through the cracks, the underlying thought; become smarter about whatever money you have and not an excuse for continued government intervention, welfare and subsidy.
Ari Armstrong -- July 31
This is not merely a difference in semantics. It is a fundamental confusion on your part.
If we are to draw a real difference between "savings" and "investment," then "savings" means we are simply putting money aside, either in the mattress or in a vault somewhere. This sort of "savings" necessarily cannot draw interest. Indeed, to place money in a vault you must pay a fee, so your returns are negative.
Only investment can draw interest. Investment means you give your money to somebody else, and they pay you back in the future, with interest. The principle is the same, whether you put your money in a bank or in stocks. What we generally call "savings" is really a particular type of investment, so it makes little sense to speak of the two as different categories.
You write, "To say that there is no distinction between the risk of capital investment and savings goes too far for most people."
Nobody has made that claim. Obviously investing via a bank is less risky than investing via stocks. The point is, it can be rational to accept greater risk for greater potential returns. You simply have not made the case that it is imprudent to invest in stocks at this time. Unless you expect the stock market to completely tank and not recover for several decades, you would be hard pressed to sustain an argument that a diverse, long-range stock portfolio is a bad investment.
But if you believe the economy is going to tank, you should not be arguing in favor of savings accounts at banks, either, because inflation could easily wipe out the real value of such an account. You should instead encourage people to buy gold etc.
In any event, I don't think you make a convincing argument. If you disagree, I will happily publish your article on my web page -- along with the follow-up e-mail discussions.
Michael Storm Tippets -- July 31
Luckily I do disagree and I think printing it would be wonderful. My self interest not withstanding, I think it's best.
I don't think I have said what you think I have, and that you are taking my argument beyond where the article itself says it is going. My intent is to spur debate and discussion on the subject of savings; which in turn should lead to a better understanding of it as a whole. So far so good.
As you point out -- which I wouldn't, couldn't, haven't argued against -- Savings with a bank is, bottom line, no different than any other investment. However, my argument states, again in so many words but never the less factually, that in our system we have the security factor of savings as well as -- I believe it is widely understood, and clearly more so true than with investment -- a general greater access, affordability, management and return over the long haul. All of this boils down to simplicity for those who don't, won't and/or can't, understand the global economic aspects of what they do, compared to what they could be doing without government created fiat and fiasco.
You write, "You simply have not made the case that it is imprudent to invest in stocks at this time."
I never did state that it was imprudent to invest at this, or any other time. I did state that the market maintains its instability (from 90's mal-investment). A cautionary point though, not a condemnation of the market process.
The fact that our markets remain unbalanced and continually interfered with only strengthens the argument for savings; as it is commonly accepted, and not crunchy mattress stuffing... Savings accounts generally reside in 'safer' investments, bonds, mutuals, things that are less likely to suffer overnight demise. Who can say that of any corporation? Given the protectionist approach to business in this country, many businesses can obfuscate failure until the literal point of collapse. The doors close overnight and the invested are left wondering "What the hell just happened?" You can argue, as you have, that the 'safer' investments can be mismanaged and also suffer from the same government (bull)headed interference, and I would not argue back; save for greater ability of the masses to manage and understand savings, and be aware of, and capable of responding, to changes likely to affect their 'investment.'
You write, "But if you believe the economy is going to tank, you should not be arguing in favor of savings accounts at banks, either..."
I certainly have my misgivings about the economy and our governments 'greater' ability to handle it. (By that I mean they shouldn't handle it at all.) But going on about a total and unmanageable collapse of economic functions (read: society) though it may prepare a few of us, is not the best route for conveying the message; that people need to take greater care, and invest time for understanding of their money. No matter what the economic tendencies of the governing body.
Ultimately my argument is not economically incorrect within the current system, does not delve into the greater differences or similarities of savings, and does not argue that savings is not a risk. Instead my argument centers on the greater concept of savings over investment, particularly blind (un, or under, educated) investment at the sacrifice of simple savings. My argument also offers the more important and underlying point of self management and common sense. These are the things that need to be reinforced in people in order to put a stop to the miss-management of Americas money through government intervention.
Ari Armstrong -- August 1
A few final thoughts. I think we all agree that generally people should put more of their money aside to prepare for future times of possible lower income. The fact that people save is more important than the particulars of how they save, at least within reasonable limits. Of course, people should make wise investments and be skeptical about wild claims. I would add, though, that, if one believes federal expenditures are immoral and/or unconstitutional, a good case can be made that buying government bonds is inappropriate.