The Paradox of Debt: Why Americans Should Save More and Borrow Less

With nearly the whole Western world in a crisis of debt, inflation, and threats of “austerity,” almost every proposed solution seems to be the same cocktail of debt and government spending that has put us here in the first place. Faced with these problems, it is time to offer a much-needed defense of saving and frugality to combat these troubling economic times. Not only is savings the heart of real capital, but it also allows individuals a shield to protect themselves against downturns and encourages us to think about the long-term future.

According to a recent All State/National Journal Heartland Monitor poll, three-fourths of Americans believe that they would be better off without carrying a burden of debt. "I would submit that the American Dream is self-determination, and enslaving yourself to creditors is no way to self-determination,” remarks one man who was polled.

And he’s right. The outstanding debt numbers in America are outrageous and unsustainable. Thanks to federal spending and borrowing, the average American is born almost $50,000 in debt. For the first time in history, student loan debt now exceeds credit card debt as more and more young Americans graduate college owing tens of thousands of dollars with little to no job prospects.

These numbers reflect an economy that incentivizes people to borrow and to go into debt. Spend, spend, spend is the mantra of mainstream economists and Washington politicians. The Federal Reserve has been lowering interest rates below market levels, creating a lending bubble that inevitably bursts. John Maynard Keynes, the godfather of the modern Western economic structure, famously worried about the “paradox of thrift.”

It is easy to understand why so many, myself included, have taken on expenses they could not afford for one reason or another. But more importantly, what can we as private individuals do?

The first thing, as any good doctor will tell you, is to do no harm. This means ignoring those in the media and in government that tell you that we must borrow our way out of debt. Tear up the credit cards, pay off as much as you can, and if at all possible, save.

It is a shame that the concept of saving has been demonized as “hoarding.” Savings, not debt, are the lifeblood of a real economy that grows and produces wealth, prosperity, and employment. Research and development, machinery, and buildings are all built by capital — someone’s decision not to spend their money immediately but instead save and invest it for the future. This means that in a free market, interest rates are determined by the amount of savings in society, not by a central bank. The further an economy strays from this simple principle, the worse off it will be in the long run.

It is true that borrowing is an essential aspect of a modern economy. But only when lending is regulated by market prices, as opposed to a central bank, can investment and loans be rationally calculated and used in the most profitable way.

Unfortunately, not only do governments continue to exacerbate the problems by printing more money or going further into debt, but they are directly (and indirectly) punishing those who were wise and saved their money. In Greece, they are beginning to clamp down on "tax evaders" with obligatory collections of household expense receipts. Greece’s Finance Minister Evangelos Venizelos has proposed a plan that incentivizes consumption while punishing those with household savings.

Here in the U.S., politicians are much sneakier about how they punish savers. Although claiming to “care” for the elderly by funding welfare transfer programs, the money-printing used to fund stimulus packages devalues the currency, punishing those living on fixed incomes or who live on their savings.

It is a shame that through interventionist policies, governments have propagated the myth that everyone should bury themselves in debt in order to go to massive universities and buy a home, and they have provided the financing through an easy money policy that no free market would ever allow.

The problem is that this debt and malinvestment must eventually be paid-off, liquidated, or concealed through more borrowing. Although we badly need jolts of the first two, more debt seems to be the only policy prescription. 

My advice to those who are worried about the future: Avoid decisions that require a lot of debt, find a job, and most importantly, save as much money as you can. We may not be able to control the public debt, but without too much private debt, we’ll be better able to handle uncertainty.

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