KRIS SAYCE: Keynesian Groundhog Day

Kris Sayce from Money Morning Australia wonders why big-time spend-ups are being favoured over big-time saving. Surely someone has to think  of the future?

* * * *

Where did all those green shoots of recovery go?
I mean, by now we would have expected the global economy to be in full swing considering how much taxpayer money has been spent bailing things out and propping things up.
After all, that’s what we were told.
That the bailouts and stimulus were required to ensure markets and economies wouldn’t collapse. That afterwards it would be all blue-sky.
But almost three years after stock markets topped out and nearly two years after markets hit rock bottom, that’s not the message we’re hearing now.
“Canada lifts rates, cuts growth outlook”, advises today’s Australian Financial Review.
While BHP Billiton [ASX: BHP] said earlier this week that it “continues to be cautious on the short term outlook for the global economy.”
And retailer Country Road, when announcing a 15-20% expected drop in full year profits said “the immediate economic outlook remains challenging but the business remains cautiously optimistic for the year ahead.”
Well that’s alright then.
But that was before US Federal Reserve chairman Ben Bernanke stuck another fly in the economic recovery soup:

Of course, even as the Federal Reserve continues prudent planning for the ultimate withdrawal of extraordinary policy accommodation, we also recognise that the economic outlook remains unusually uncertain.”

Oops!
Naturally our friend at the New York Times, Dr. Paul Krugman is still saying that the economy needs more stimulus not less,

The best way for Mr. Obama to have avoided an electoral setback this fall would have been enacting a stimulus that matched the scale of the economic crisis.”

And in today’s The Age, Robert Skidelsky of Warwick University in the UK quotes John Maynard Keynes:

An act of saving means … a decision not to have dinner today. But it does not necessitate a decision to have dinner or to buy a pair of boots a week hence. … Thus it depresses the business of preparing today’s dinner without stimulating the business of making ready for some future act of consumption.”

We’ve spent enough time being bored rigid by Keynes’ General Theory, so we’ll take Lord Skidelsky’s word for it that he’s provided an accurate quote.
The fact is Skidelsky and Keynes have got it completely wrong. And so has Krugman who Skidelsky claims said about Keynes’ revelation: “Getting to that realisation was an awesome intellectual achievement.”
“Awesome” isn’t quite the word we would’ve used. We would have picked “awful” instead.
Think about it. Keynes says “An act of saving means… a decision not to have dinner today. But it does not necessitate a decision to have dinner or to buy a pair of boots a week hence… Thus it depresses the business of preparing today’s dinner without stimulating the business of making ready for some future act of consumption.”
While it’s correct to say that not buying something today doesn’t necessarily mean that someone will definitely buy something in one week, it also doesn’t necessarily mean that they won’t buy something the week after, or the week after that.
You see, saving money today simply means preferring to have the money in your pocket or bank account rather than buying goods or services.
It’s what Austrian economists call “value scales.”
Consciously or subconsciously, whenever you choose to buy or not to buy something you’re making a choice between either having money now or having the good or service now.
If you spend then you’ve made the choice that you’d rather have the good or service than the money.
If you save then you’ve made the choice that you’d rather have the cash than the good or service. But it doesn’t mean you won’t change your value scale next week. Next week you may take the opposite view and prefer to have the good or service rather than the cash.
Even if you’re spending on frivolous items such as putting money in one of those claw machines that you see at an amusement arcade, you’re still using a value scale.
You’re making the decision that $1 spent on trying to pick up a cuddly toy with a flimsy claw thing is more value to you than keeping the $1 in your pocket. Maybe that’s because you like your odds of winning a $10 gift for just $1.
Or it could be that you think $1 is a good price to pay for the entertainment value and the enjoyment you get from trying to win something.
Naturally enough, if you spend that $1 today on the claw machine and received your enjoyment, it means that you won’t be able to spend that same dollar on similar amusements next week.
But, providing you continue to work productively over the next week you should have earned another $1 which you can also choose to spend on amusements.
However, if you choose not to spend the money on amusements today then you’ll have this week’s dollar plus next week’s dollar to spend. You’ll have twice as much.
Here’s the point, ultimately you save for a reason. Few people save just in order to build a massive pile of cash just for the sake of having a massive pile of cash.
The reason most people save is so they can spend in the future. In other words saving is just another way of expressing future spending. For instance you may be saving for retirement or to buy a new car or saving for a holiday.
That’s what saving is, building up your future spending capacity.
But according to wise-guys like Keynes, Skidelsky and Krugman, if you don’t spend today but instead save, the money just disappears. Because apparently it “depresses the business of preparing today’s dinner without stimulating the business of making ready for some future act of consumption.”
They couldn’t be more wrong. Because “stimulating the business of making ready for some future act of consumption” is exactly what saving does.
If Keynes was right, then as we’ve pointed out before, businesses wouldn’t bother with a stock inventory. Machinery makers would build machines that lasted for just one day. Imagine what a ridiculous and unsustainable economy that would be.
In actual fact it’s the act of stimulating an economy through quantitative easing, excessive government borrowing, and credit that does what the Keynesians claim saving does.
It encourages people, businesses and governments to spend today to stimulate the economy. All of which has the consequence of robbing money from the future.
So that when the future arrives the people are so overwhelmed by paying back the interest that they can’t afford to consume.
Yes, not spending today may depress spending today, but bringing spending forward simply creates the kind of boom and bust cycles that created the problems we’re going through now.
The massive expansion of credit – which the boffins want to recreate – is just like taxpayer funded stimulus spending. There’s little difference.
Both involve taking future income and spending it today, leaving nothing for the future. Hence the boom and bust cycle.
But that’s only half the problem. Perhaps the biggest problem created by stimulus spending is the impact it has on creative destruction.
It’s a pretty tough sounding phrase isn’t it?
The kind of phrase that should be said with a deep and booming voice. An Orson Welles type voice if you like.
But just what is creative destruction?
Well, simply put, it’s a fancy economic term to describe the occurrence of new innovations replacing older innovations.
It involves new companies replacing old companies. Old companies getting shoved aside by bright new companies and ideas.
Obvious examples are the typewriter losing out to the word processor, and then the word processor losing out to the personal computer.
Or horse drawn carts being replaced by motor cars, and sail ships losing the battle against steam ships.
I’m sure you get the picture.
The key message is that creative destruction is what drives progress. But creative destruction can only occur if there is investment. And that includes savings.
It enables entrepreneurs to finance and bring to life the new idea that could change the way individuals or businesses do things.
Incidentally, creative destruction is what I try to look for when tipping stocks in Australian Small-Cap Investigator.
Most of the time I’m looking for a stock that is out of the ordinary. A stock that holds the key to a game-changing technology or a new approach to its chosen market.
But it can also mean looking at companies that aren’t necessarily innovative in what they’re producing but rather that they’re innovative in how or where they do it.
Last month’s tip is a good example. However, I won’t give away any clues here though as even the smallest clue could give the game away, and that wouldn’t be fair to paying subscribers.
Anyway, back to the point. As I mentioned above, creative destruction drives progress. Or to be more precise, the entrepreneurial activity behind creative destruction drives progress.
Without it you’d still be foraging and hunting for food, and probably still mulling over the problem of how to easily move things from A to B.
That’s why when you see or hear a vested interest – such as a corporate executive or trade unionist – tell you that a particular change or the lack of a subsidy or bailout will destroy jobs and harm business, you should consider what the real full implications are, not just the immediate impact of the change.
I mean, if we take one of our examples from above, horse drawn carts, it goes without saying that it’s not just the pilots (or whatever they were called) of the horse drawn carts that would have lost their jobs as the motor vehicle took over, but those in allied industries as well.
Such as hostlers and blacksmiths, wheelwrights and tanners. Many of them would have been dumped out of their job. Years of apprenticeship and on-the-job training would have been lost.
But imagine if hostlers, blacksmiths, wheelwrights and tanners had received a massive bailout or subsidy by governments. What impact would that have had on progress?
Sure, odds are that eventually the motor powered vehicle would still have pushed the horse and cart aside, but it would have made the development of the new technology much harder.
It would have taken resources away from new innovation and given it to an industry that was about to die.
It would have made it harder for consumers to afford these new machines as they would have been funding the subsidy to the horse and cart industry through their taxes. And it would have made it harder for the bright new industries to compete.
Anyway, that’s just an example, I think you can see the point we’re trying to make.
We’ve seen exactly that happen over the last couple of years, especially in the finance industry. But it will have flowed through to other industries as well.
Right now they will be millions of entrepreneurs worldwide being denied access to investment funds because governments are too busy using taxpayer dollars to prop up corrupt and insolvent banks.
Entrepreneurs being denied capital because governments are more interested in propping up the construction industry with taxpayer dollars rather than allowing new industries and ideas to flourish.
The problem as we see it is that Keynesians and their like actually have no concept of the future. They only see the present. They see less spending today as a lost opportunity. They have no consideration for tomorrow until tomorrow arrives.
They are stuck in their own Groundhog Day, believing that yesterday’s actions will have no impact on today. And because tomorrow will be just like today there’s no reason to save or prepare for it.
It’s that attitude which not only causes boom and bust cycles and the gradual impoverishment of the individual, but just as importantly it impedes creative destruction and therefore impedes progress.

Cheers.
Kris Sayce