Part of the problem we face today is the unbelievable ignorance or basic economics. You’d think, or at least hope, that such silly ideas as printing money and massive government debt would be seen as the great acts of destruction they are. Nothing exemplifies this grand ignorance better than this:
The weakness over the year reflected the battering that consumers have taken from the worst recession since the Great Depression, a downturn that has cost 7.2 million jobs and left households trying to rebuild savings depleted by losses on Wall Street and a crash in housing prices.
I’ll wager $1 million that no econ major from any Ivy League school would see the terrible error in that passage. But I’d wager $1 million that ANY student at Mises U would not only see it, but would harass me for such an easy question.
Now, where is the error? “savings depleted by losses on Wall Street and a crash in housing prices” NEITHER of those are savings. And that is actually the root of our current mess. People acted as though they were.
Look, it’s actually quite simple. Savings is income not spent.
Now, let’s look at a practical reason why, for instance, housing prices are not real savings. Forgetting for the moment how unbelievably stupid the actual notion is that housing prices equal savings. In fact, that idea only serves to demonstrate a complete lack of any understanding of what prices really are. Anyways…
If one buys a house for $250,000 in 2003 and following Alan and Ben’s dirty deeds done dirt cheap, it’s value appreciates to $500,000 in 2006 (and by the way, this was very much the case in many housing markets. I can attest personally…). Now, let’s say I decide to buy something with that “extra” $250,000. Do I go to the bank and withdraw it, or do I have to borrow the money?
Well, the answer is so obvious that one would have to be a Princeton professor who moonlights for the NY Times…
So, that alone ought to end all debate on whether it’s actually savings. Thus, no savings were lost, nothing to rebuild. Same is true of course of 401k’s: prices DO NOT equal savings.
Need more proof? Okay. If that “extra” $250,000 were really savings, then it would show up in banks’ balance sheets as excess reserves that could be lent. Your home’s increased equity doesn’t show up in any bank ledgers. It only records the appraised value at time of the loan.
But again, it is such terrible ignorance that helps begin to explain the catastrophe we’re in.