Friday, July 8, 2011

The real root of prosperity

Hans Palmstierna over at the end of civilization has lucidly explained the problem of *negative interest rates* - in which inflation exceeds the nominal rate of interest - and what they inevitably lead to: the evaporation of capital. The logic is simple. If savings is the root of investment and capital, then an enviroment that discourages savings will dry up the capital markets, which are the basis for any economy. Negative interest rates are a huge impetus to spend your money now - because why would you want to save money that depreciates faster than your rate of return - and even to borrow for consumption. There is no more instructive example of this happening than in the recent evisceration of the U.S manufacturing base.

Paul Krugman and other neo-Keynesians have it precisely backwards; it is not because of increased savings that have shredded the economy, but the lack of savings. Too much spending, too much debt. The answer to the question many observers have asked as they try to make sense of our economic plight is that our political ruling class, guided by academia, has identified the wrong source of prosperity. The reason mainstream economics is wrong and the policies based on it have failed is because it is savings, not spending, that leads us to the road of prosperity. In spendthrift lies the path to poverty.

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