7/10/09
CNBC contributor Ron Insana, a man who is decidedly NOT on my short list of people in the financial industry, broadly defined, whom I respect, made a comment yesterday that is so silly on a number of levels that it merits comment. When discussing the advisability of a new round of “stimulus” program, Mr. Insana, who was sort of taking my side of the argument (i.e., no), but in his typical milquetoast fashion, proposed not a full-blown, Bush/Obamaesque spending orgy but, rather, a temporary payroll (i.e., FICA) tax holiday. Mr. Insana said this would be a good idea because “with the savings rate up, people are likely to spend it.”
Hmm…
First, this argument continues the Alice in Wonderland logic that has dominated much of this once great nation’s economic thinking for at least the last twenty years, to wit, spending is good, savings are bad, exactly the sort of thinking that got us into the brine in which we are currently swimming. And, yes, deep thinkers out there, we need savings even in a recession, and especially under the current economic circumstances that must not be named (See my last point of contention with Mr. Insana’s comments.) because ultimately it is capital formation, not spending, that gets an economy back on track.
Second, Mr. Insana’s argument makes no sense arithmetically. If the savings rate is 6% (about the point to where it has risen over the last year or so), people will not spend all of their payroll tax cut, but, rather, if the savings rate holds, will spend 94% of said tax cut. If the savings rate were higher, they would spend less of it; it’s just a matter of arithmetic. But Mr. Insana seems to argue that the higher the savings rate, the more people will spend, which makes no sense on its face.
Clearly, Mr. Insana is looking at the situation prospectively. If people have done some saving and cleaned up their balance sheets, they are more likely to spend whatever extra money (“Extra” money—talk about two words that don’t work well together! But I digress.) comes their way. This is an example of the kind of naïve thinking that dominates a financial community that is populated by people who have not been around long enough to experience “normal” and thus assume that the fantasy world in which they have been operating for their entire careers is indeed “normal.” What Mr. Insana, and the financial braintrust he so exemplifies, seems to not understand is that we have been p---ing away prior generations’ savings for at least twenty years, and have reached the point at which the silos are empty and are in serious danger of being bought by the Chinese as they seek room to store all the IOUs they have accumulated from us during the spending and borrowing binge we have laughingly called an economy for at least the last generation. A few months of what would have been considered a meager savings rate by our forbearers, but that seems positively astronomical given our the at or near negative savings rates that have prevailed in our once great nation since people like Mr. Insana started dispensing financial advice, is not enough to dig us out of the hole our longstanding extravagance and sense of entitlement have dug for us. We will have to dramatically increase our savings rate for decades, not just stop throwing away every dime we can borrow for a few months, if we are ever to restore the financial foundations of this country.
Sadly, though, the type of thinking displayed by Mr. Insana seems to dominate the financial approach of the typical American. “Hey,” our modern American might say, “I’ve managed to put couple grand away and I’m comfortably making the minimum payment on my credit cards. I’m as financially solid as the rock of Gibraltar! I guess now I can buy another flat screen and lease another car I can’t possibly afford!” According to Mr. Insana’s logic, such an attitude is salubrious for our economy. And people continue to regard the likes of Mr. Insana as financial experts.
It is indeed over, my friends.
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