NCPA - National Center for Policy Analysis


July 17, 2007

The main fallacy in monetary theory and policy is the confusion of money and wealth. The bottom line is that real wealth has to be produced; it can't be printed, says Bob McTeer, distinguished fellow at the National Center for Policy Analysis.

One reason this distinction is important is the growing number who dismiss the adverse consequences of our low personal saving rate by saying it ignores capital gains as a source of spending.  "Properly measured," they say, saving is not a problem.  That may be true for the few, but not for the many, says McTeer:

  • A penny saved may be a penny earned, but it matters whether it was earned by producing more or by a rise in the price of existing financial assets.
  • A stock or housing market boom creates apparent wealth in the form of capital gains, but trying to convert it to real wealth en masse can make it disappear.
  • The irony is that policymakers advise more saving but those who take the advice will benefit only if most of us ignore it; and policymakers are implicitly counting on that outcome.

A parallel is the farmer who hopes for a good crop year, says McTeer.  But, if all or most farmers have a good crop year, the decline in prices may more than offset higher yields. What our farmer really needs is a good crop in a bad crop year.

Alan Greenspan has been one of the few economists to explain these matters correctly and understandably, usually in the context of entitlement reforms.  He frequently pointed out that any solution to the problem had to include real economic growth.  With claims on output growing rapidly, output has to grow equally rapidly or the claims are bogus. Any solution -- to entitlements or the savings rate -- must include a bigger, more productive economy in the future.

Source: Bob McTeer, "Don't Dismiss Our Dismal Savings Rate," Wall Street Journal, July 17, 2007.

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