…they never tell you how to save your money. No one tells you. We’ve been trained to spend money since we were born with all these commercials with toys and G.I. Joes and Transformers. But there’s so many things in the supermarket, there’s so many things on television that automatically when you turn it on are saying “Buy! Buy! Buy! Buy! Buy! Buy! Buy!” And no one’s ever saying, “Save! Save! Save! Save! Save! Save! Save! Save!”
–Donald Faison on MarketPlace Money last night
It’s worse than that. Since Greenspan’s 1987 interventions politicians and bankers alike have sought to discourage saving. Rock-bottom interest rates are specifically intended to drive money into the economy and into more risky investments in search of a better return. Thus, they hope, can the bubble be kept inflated. It worked for awhile, exploded in their faces, and is now being attempted again.
With deposit interest rates near zero, however, there is little penalty for holding cash in the form of currency, especially with inflation almost non-existent. The challenge is this — the ‘velocity’ of currency under the mattress, or in gold and silver is [i]ZERO[/i].
Velocity is key, and it is the one element that the Austrian economists missed. The money supply times its velocity equals GDP. Crashing velocity can overwhelm the printing presses, dragging down GDP. GDP can also be seen as price times the quantity of goods.
If GDP is dropping and the quantity of goods (and services) remains constant, prices will decrease. We’re seeing that phenomenon across wide swaths of the economy, and it has begun to creep into wages. Colorado is adjusting its state minimum wage lower. Hours and benefits are being cut. Welcome to deflation.
Deflation, however, rewards savers and punishes debtors. Once triggered, it is much more difficult to control than inflation, which can be choked off with high interest rates. As the economy flirts with significant deflation for the first time in two generations, no wonder politicians and bankers are going nuts.