Here, Gregory Bresiger explains why saving is so vitally important to our nation's economic health. Modern political thought, and sadly enough, what passes for main-stream economic thinking, even from Nobel Prize winners like Paul Krugman, tells us that borrowing to spend on consumption goods is the path to prosperity.
Borrowing has its place. Most of us borrow at sometime in our lives. But prudent people borrow for one of just a few good reasons. People who borrow to finance a productive activity that will earn enough to repay the loan plus interest on the loan plus income to sustain themselves borrow prudently. Business owners who produce and sell a product lots of people want to buy do this kind of borrowing all the time.
People who borrow to purchase big-ticket capital goods (such as a house) that will generate a continuing future stream of value for them may be borrowing prudently, if they have a reasonable expectation of being able to make regular monthly payments over the life of the capital good. Obviously, people who borrow without a reasonable expectation of being able to make those monthly payments do so imprudently and to their impending peril. We have lots of experience in the recent past with that sort of imprudent borrowing.
What about borrowing by governments? The guidelines for prudent and imprudent borrowing don't change just because its a government doing the borrowing. Borrowing to finance productive activity --- activity that generate sufficient returns to repay the loan plus interest --- can be very prudent government borrowing. Any number of people believe that a good example of this sort of borrowing is the American space program and its forays to the moon.
Government borrowing to finance spending on capital goods such as roads to somewhere lots of people want to go, bridges to somewhere lots of people want to go, and technology to defend ourselves from bad guys can certainly be prudent. But only if the value streaming from those capital goods is sufficiently high, and only if government can reasonably expect to be able to repay the loans plus interest.
Government borrowing to finance current consumption with no reasonable expectation of repaying the loan plus interest is imprudent, just as it is if you or I borrow to finance current consumption with no reasonable expectation of repaying the loan plus interest.
I have written in EconoBlast more than once that you can't borrow what hasn't already been produced and saved. Today's politicians don't seem to get that message. Until they do, America's economic future is in jeopardy. Europe's perilous economic future has already arrived in the body of the PIIGS. Despite the lack of continuing mainstream media coverage, the PIIGS are not anywhere near out of the woods. Some people think that the next stock market meltdown will be precipitated directly by the ongoing European debt problem, even though we haven't heard much about it in recent months.
Imprudent borrowing, like the borrowing the PIIGS have done and like the United States Congress continues to do, will be our undoing. Saving like our grandparents and parents did could heal America and the rest of the world. Regular readers of EconoBlast may be growing weary of it, but it's still true. You can't borrow what hasn't already been produced and saved.
Borrowing has its place. Most of us borrow at sometime in our lives. But prudent people borrow for one of just a few good reasons. People who borrow to finance a productive activity that will earn enough to repay the loan plus interest on the loan plus income to sustain themselves borrow prudently. Business owners who produce and sell a product lots of people want to buy do this kind of borrowing all the time.
People who borrow to purchase big-ticket capital goods (such as a house) that will generate a continuing future stream of value for them may be borrowing prudently, if they have a reasonable expectation of being able to make regular monthly payments over the life of the capital good. Obviously, people who borrow without a reasonable expectation of being able to make those monthly payments do so imprudently and to their impending peril. We have lots of experience in the recent past with that sort of imprudent borrowing.
What about borrowing by governments? The guidelines for prudent and imprudent borrowing don't change just because its a government doing the borrowing. Borrowing to finance productive activity --- activity that generate sufficient returns to repay the loan plus interest --- can be very prudent government borrowing. Any number of people believe that a good example of this sort of borrowing is the American space program and its forays to the moon.
Government borrowing to finance spending on capital goods such as roads to somewhere lots of people want to go, bridges to somewhere lots of people want to go, and technology to defend ourselves from bad guys can certainly be prudent. But only if the value streaming from those capital goods is sufficiently high, and only if government can reasonably expect to be able to repay the loans plus interest.
Government borrowing to finance current consumption with no reasonable expectation of repaying the loan plus interest is imprudent, just as it is if you or I borrow to finance current consumption with no reasonable expectation of repaying the loan plus interest.
I have written in EconoBlast more than once that you can't borrow what hasn't already been produced and saved. Today's politicians don't seem to get that message. Until they do, America's economic future is in jeopardy. Europe's perilous economic future has already arrived in the body of the PIIGS. Despite the lack of continuing mainstream media coverage, the PIIGS are not anywhere near out of the woods. Some people think that the next stock market meltdown will be precipitated directly by the ongoing European debt problem, even though we haven't heard much about it in recent months.
Imprudent borrowing, like the borrowing the PIIGS have done and like the United States Congress continues to do, will be our undoing. Saving like our grandparents and parents did could heal America and the rest of the world. Regular readers of EconoBlast may be growing weary of it, but it's still true. You can't borrow what hasn't already been produced and saved.
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