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Combs: Savings vs. borrowing; which leads to real wealth?

To judge Washington economic policy, apply it to your own budget

By Britt Combs | The McDowell News

Published: September 2, 2009

Savings –- spending less than you earn –- is the fuel of long-term sustainable prosperity. That holds true at every level. When a family earns more than it spends, it is able to improve its home, or its diet, or the education available to its children. We give prosperity to our children by spending wisely.

A business, whether small or global, increases its market share and its profitability by reinvesting profits in the future of the market. In times of economic growth, that business will be in the best position to prosper. While other businesses are growing on credit, the frugal, wise businessman will realize greater profits.

More importantly, in times of market contraction, that business which based its growth on savings and targeted investment will be in the best position to survive, and those who built their growth on borrowing, or "leverage," will tend to suffer or even die.

This is the rule of nature, the survival of the fittest at work in the market. The market functions as a natural force.

When the housing bubble burst and unemployment and the threat of unemployment became serious, Americans wisely and correctly cut out discretionary spending, paid off credit cards and increased household savings. That was exactly the right thing to do, and the majority of households did it. This was the free market at work, responding to a crisis by imposing a "correction" in behavior.

It's like the fable of the tortoise and the hare; wisdom and frugality bring prosperity while waste and shortsightedness lead to ruin.

And yet the federal government and the financial, investment and banking media have continually characterized efforts to pay down debt and prioritize consumer spending as greedy, selfish and counterproductive to "recovery." They argue consumers should increase spending, borrow more money, go further into debt for the sake of recovery.

They define recovery as a return to the bubble activity that has led to the current recession. The hares have devised a system by which they can punish the tortoise for his frugality and reward themselves for their waste. They inflate the currency to bail out businesses and banks for bad investment. If you have no savings then inflation does not sting you. But if you have been careful and saved, then inflation will rob you of everything you have saved.

Over-leveraging and the perpetual bubble economy is the great common ground where all the Democrats and all the Republicans meet and shake hands. It's a game of hot potato, where the last one holding the bad check is the loser. Government has given us the savings and loan bubble, the "dot com" bubble, then the real estate bubble.

Now it's the banking bubble that's being frantically pumped up. Counterfeit money is being pumped into the banking and financial industry. Leverage – debt – will fuel the recovery, according to the pundits. It's your duty to buy a new house, a new TV, a new car.

First-time homebuyer tax incentives have fueled the recent "improving" housing market, just as "cash for clunkers" give-aways have sparked celebrations in the auto industry. Our dear and beloved leaders in Washington are well aware though, that they are underwriting even more bad debts. The housing collapse was brought on by too many loans being made to too many borrowers who could not pay their debt. Government and the banks created a condition where more homes were built than the market could afford.

More bad mortgages will not solve the housing crisis. By the same token, over-production of automobiles has been a major factor in the crash of the auto market. Americans, as Peter Schiff so wisely said, do not need more cars. We have lots and lots of new cars already.

The market says there has been too much investment in housing and cars. That means those resources need to be reallocated to other sectors. That's called a market correction and it works every time it's allowed to happen.

But it's not being allowed to happen. Treasury and the Fed are protecting the bad actors, bailing out businesses and banks that deserve to fail. This keeps the campaign contributions flowing, and that's all that counts. To understand this you need only put yourself in their shoes. If you'd leveraged your company to the hilt, made a slew of bad investments and left your company with no hope of recovery, what do you do?

The answer is, of course, you babble as much incomprehensible nonsense as you possibly can, swear up and down you have restructured your operations and positioned the company to prosper in the future. All that to one purpose: to keep the investors and creditors fooled long enough to allow the executives to loot the company of as many bonuses, perks and assets as possible before the collapse comes.

And that, dear friends, is the secret of the Great Recovery. Common sense says it's a lie. You keep right on paying down your debt and tightening spending. You're doing more to restore prosperity that Obama or Bush or Bernanke ever dreamed of.