February 20, 2011

Savers & Spenders

Calling for the Return and Celeberation of Risk in the "Market"

This is an age old question: Who is more important for the Economy: Savers or Spenders?

The importance of spenders is slam dunk. One man's spend is another man's income. Collapse of spending, owing to fear one is about to lose one's job, or the products in the market failing to excite, or too high priced for the value perceived of them, spells also a collapse of employment.

On the face of it, it appears that Savers are equally important. For their savings make available the Capital for new production that boosts employment. However, the importance of these savers falls when there is a Central Bank- Banking System complex creating the investment money needed by the economy, using the Banking Leverage. The bad part of this Capital is that it is largely debt. For formation of Equity Capital, once again, Savers become important.

So far we can say, public policy need not be concerned with creating savers that want to supply debt Capital to new enterprises, Central Bank-Banking System complex ¦ Banking Leverage suffices. The only useful savers are those that will supply Equity Capital for new Enterprises or will start these themselves.

With the above framework, one can conclude that the protection provided to people's deposits in failing Banks needs to be significantly scaled down. The protection should be reasonably limited to the amount people need for a rainy day, and protection for Bank deposits need not be per Bank account. The older people need more safe money than younger folks, which needs to be factored.

There is a crying need for age based, across-the-Banks, limited protection paradigm. Beyond that, the individual chooses to either spend his money or takes the risk in making equity investments. Much of the economic crisis has been due to the desire of Governments to ENSURE Returns AND Safety to people from Fixed Income AND Variable Income savings instruments, many of which are actually gambling instruments. The need of the time, actually for all times, is that the Govt stays hands-off on returns and safety of savings instruments, with robust protection for the seniors, and very limited for others. The valuation of stocks, and keeping them in a Bull run, is not a Gov responsibility, nor does it make sense to insure EVERY Bank Depositor for USD 250,000, and per Account, at that.

Government needs to focus it's energies and resources on it's real tasks, from Social Security to modest Unemployment Assistence to Education, Infrastructure and Basic Research. It should not concern itself with the Dow Jones or NASDAQ. When it does that, it plays into the hands of Wall Street, then willy nilly it ends up insuring THEIR profits and Bonuses. And this comes at the cost of falling short on Real Gov functions. The only help that the Gov can give to players in stockmarkets is in its vigilance on fraudulent accounting in public companies and "lax" auditors. Also, the need is to recognize that much of stockmarket investments are actually bets on cards the players have no idea how good or bad they are. The gains from these bets need to be taxed no less than income from work, perhaps more.

Due to the gamblerization, the another responsibility of the Gov is to regulate the compensation distribution in public companies, rather than sinking deeper and deeper into showering Corporate and Personal Tax breaks that give No uplift to Employment, only to Executive Compensation and Stockmarkets. These further cause the Gov to fall short on the expected focus of their actions and spending. It obviously receives a backlash from the people, who want Gov to spend/invest their money in what are Government functions, not in strengthening a Bizarro Capitalist / Inverted Socialist "system".

The real Demand Stimulus for the Economy will come from within the Private Sector, by evening out the compensations. As Henry Ford said, "I pay my employees well....so they can buy my cars!" Tax breaks and wasteful Gov procurement is no way to stimulate, and as I wrote above, detracts the Gov, and its money, from its functions in which it is already falling short. If anything, need is to Raise taxes.

As for one's savings and investment, there is a need for individual responsibilty, a return to the classic, individual Risk-Return decision, with Gov hands off from it, except limited protection, more for retirees, with respect to designated fixed income instruments.

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