7DIF#6Refutation

DeadlyInnocentFraud#6:Weneedsavingstoprovidethefundsforinvestment.

Fact:Investmentaddstosavings.

Reality:Everyrealinvestmentrequiresaprioractofrealsavings.Theactofinvestmentisthe
commitmentofresourcestoaparticularprojectwiththegoalofearningaproductivereturnon
thoseresources(returnoforiginalcostplussomeprofit).Ifrealsavingswerentrequiredto
makerealinvestments,wecouldincreaseourpoolofinvestablecapitalbysimplyincreasingthe
numberofcapitaltokens(suchasmoney)inexistence.Thisisthelogicofcentral
bankinducedbusinesscyclesandwhytheyinevitablyleadtobust.

Secondtolastbutnottheleast,thisinnocentfraudunderminesourentireeconomy,asit
divertsrealresourcesawayfromtherealsectorstothefinancialsector,withresultsin
realinvestmentbeingdirectedinamannertotallydivorcedfrompublicpurpose.Infact,
itsmyguessthatthisdeadlyinnocentfraudmightbedrainingover20%annuallyfrom
usefuloutputandemploymentastaggeringstatistic,unmatchedinhumanhistory.And
itdirectlyleadsthetypeoffinancialcrisiswevebeengoingthrough.

Itbeginswithwhatscalledtheparadoxofthriftintheeconomicstextbooks,whichgoes
somethinglikethis:Inoureconomy,spendingmustequalallincome,includingprofits,
fortheoutputoftheeconomytogetsold.(Thinkaboutthatforamomenttomakesure
youvegotitbeforemovingon.)Ifanyoneattemptstosavebyspendinglessthanhis
income,atleastoneotherpersonmustmakeupforthatbyspendingmorethanhisown
income,orelsetheoutputoftheeconomywontgetsold.

Unsoldoutputmeansexcessinventories,andthelowsalesmeansproductionand
employmentcuts,andthuslesstotalincome.Andthatshortfallofincomeisequaltothe
amountnotspentbythepersontryingtosave.Thinkofitasthepersonwhostryingto
save(bynotspendinghisincome)losinghisjob,andthennotgettinganyincome,
becausehisemployercantsellalltheoutput.

Sotheparadoxis,decisionstosavebynotspendingincomeresultinlessincomeand
nonewnetsavings.Likewise,decisionstospendmorethanonesincomebygoinginto
debtcauseincomestoriseandcandriverealinvestmentandsavings.Considerthis
extremeexampletomakethepoint.Supposeeveryoneorderedanewpluggablehybrid
carfromourdomesticautoindustry.Becausetheindustrycantcurrentlyproducethat
manycars,theywouldhireus,andborrowtopayustofirstbuildthenewfactoriesto
meetthenewdemand.Thatmeanswedallbeworkingonnewplantsandequipment
capitalgoodsandgettingpaid.Buttherewouldnotyetbeanythingtobuy,sowewould
necessarilybesavingourmoneyforthedaythenewcarsrolloffthenewassembly
lines.Thedecisiontospendonnewcarsinthiscaseresultsinlessspendingandmore

savings.Andfundsspentontheproductionofthecapitalgoods,whichconstitutereal
investment,leadstoanequalamountofsavings.

Iliketosayitthisway:Savingsistheaccountingrecordofinvestment.

ProfessorBasilMoore
IhadthisdiscussionwithaProfessorBasilMoorein1996ataconferenceinNew
Hampshire,andheaskedifhecouldusethatexpressioninabookhewantedtowrite.
ImpleasedtoreportthebookwiththatnamehasbeenpublishedandIvehearditsa
goodread.(Imwaitingformyautographedcopy.)

Unfortunately,Congress,themediaandmainstreameconomistsgetthisallwrong,and
somehowconcludethatweneedmoresavingssothattherewillbefundingfor
investment.Whatseemstomakeperfectsenseatthemicrolevelisagaintotallywrong
atthemacrolevel.Justasloanscreatedepositsinthebankingsystem,itisinvestment
thatcreatessavings.

Sowhatdoourleadersdointheirinfinitewisdomwheninvestmentfalls,usually,
becauseoflowspending?Theyinvariablydecideweneedmoresavingssotherewill
bemoremoneyforinvestment.(AndIveneverheardasingleobjectionfromany
mainstreameconomist.)ToaccomplishthisCongressusesthetaxstructuretocreate
taxadvantagedsavingsincentives,suchaspensionfunds,IRAsandallsortsof
taxadvantagedinstitutionsthataccumulatereservesonataxdeferredbasis.
Predictably,allthattheseincentivesdoisremoveaggregatedemand(spendingpower).
Theyfunctiontokeepusfromspendingourmoneytobuyouroutput,whichslowsthe
economyandintroducestheneedforprivatesectorcreditexpansionandpublicsector
deficitspendingjusttogetusbacktoeven.

Thisiswhytheseeminglyenormousdeficitsturnoutnottobeasinflationaryasthey
mightotherwisebe.

InfactitstheCongressionallyengineeredtaxincentivestoreduceourspending(called
demandleakages)thatcutdeeplyintoourspendingpower,meaningthatthe
governmentneedstorunhigherdeficitstokeepusatfullemployment.Ironically,itsthe
sameCongressmenpushingthetaxadvantagedsavingsprograms,thinkingweneed
moresavingstohavemoneyforinvestment,thatarecategoricallyopposedtofederal
deficitspending.

And,ofcourse,itgetsevenworse!Themassivepoolsoffunds(createdbythisdeadly
innocentfraud#6,thatsavingsareneededforinvestment)alsoneedtobemanagedfor
thefurtherpurposeofcompoundingthemonetarysavingsforthebeneficiariesofthe
future.Theproblemisthat,inadditiontorequiringhigherfederaldeficits,thetrillionsof
dollarscompoundinginthesefundsarethesupportbaseofthedreadedfinancialsector.

Theyemploythousandsofpensionfundmanagerswhippingaroundvastsumsof
dollars,whicharelargelysubjecttogovernmentregulation.Forthemostpart,that
meansinvestinginpubliclytradedstocks,ratedbondsandsomediversificationtoother
strategiessuchashedgefundsandpassivecommoditystrategies.And,feedingon
thesebloatedwhales,aretheinevitablesharksthethousandsoffinancial
professionalsinthebrokerage,bankingandfinancialmanagementindustrieswhoowe
theirexistencetothis6thdeadlyinnocentfraud.