"Capitals are increased by parsimony, and diminished by prodigality and misconduct." Adam Smith, Wealth of Nations, p. 367
Although any governmental report that presumes to put a number on total American wealth is bound to be riddled with inaccuracies, a Federal Reserve study last week revealed that American household wealth had risen to a record high of $81.5 trillion. Assuming the figures within are even passably accurate, they expose as false a lot of popular myths promoted by politicians, economists and the pundits who enable them.
First and foremost, $81.5 trillion in household wealth puts to rest yet again the silly belief that Americans don't save. If they didn't save, they wouldn't have household wealth in the first place.
If Americans didn't save, it also true that banks, investment banks, mutual fund companies, and money management firms offering all manner of vehicles for savings wouldn't bombard them on a daily basis with calls, letters and advertisements begging them for their savings and investment accounts. Businesses focused on investing the savings of individuals thrive in the U.S. precisely because Americans are great savers.
Of course, the fact that Americans are great savers similarly exposes as fraudulent frequent headlines of the "debt bubble" variety. Though savings migrate to the U.S. from around the world (those who have wealth want to put it to work where it's going to be treated best, and where the most talented reside), the simple truth is that for every debtor there must be a saver. It's arguably the most ironclad law of them all: for someone to borrow, someone must save first.
The above truth exposes as wildly silly a popular view inside the same Fed that authored the study on American wealth. It comically and tragically believes that it can and should decree low rates of interest on saving. The idea behind such adolescent thinking is that low rates of interest will render credit ‘easy.' Wrong. For credit to be ‘easy', it must be that it's ‘easy' for savers to earn a market-based return on their savings. In that case, for the Fed to attempt to push interest rates below a natural level that would be achieved in actual markets is for the Fed to render credit tight.
Taking this further, in cities, states and countries populated by the talented, the most basic of logic dictates that falsely arrogant central bankers needn't worry about borrowing rates being too high. They don't need to simply because the economically skillful are magnets for credit. The fact that Americans are so rich means that the Fed is wasting its time - and invariably reducing the amount of credit on offer - when it seeks to artificially lower the rates of interest paid to the savers whose savings make wealth creation possible.
Mentioned earlier was the truth that savings reach the U.S. from around the world. Of course they do. Savings in dollars, euros and yen aren't real resources, rather they're the proverbial ‘tickets' that can be exchanged for real resources. It's only natural that the lion's share of the world's economic resources - meaning credit - would reach the richest and most productive people in the world. When the global economy grows, savings flow to where the wealth is being created.
All borrowing is a function of saving, all demand begins with production first, and logically all credit that is accessed is a function of credit being offered. Contrary to Austrian School musings about "excess credit," the truth is that there's no such thing. Demand is once again balanced by supply, and so does credit accession balance with credit creation. Those who have much to offer can access a great deal through the borrowing mechanism.
Applied to the U.S., it's no surprise that Americans can borrow so much. They not only in aggregate have the most wealth in the world (their high savings mean they have the collateral to utilize the savings of others at low rates of interest), but they also represent the potential for staggering wealth creation.
To understand why, consider Jeff Bezos, Larry Ellison, and Fred Smith. If tomorrow they were to give away every worldly possession, every Amazon, Oracle and FedEx share they own, and every dollar in their various bank and brokerage accounts, they would still be immensely wealthy. They would be because of who they are.
Bezos, Ellison and Smith could tap enormous reserves of credit (resources) even without a cent to their names because of what they've done in the past, and by extension, what they could achieve with economic resources in the future. When individuals go to banks, investment banks and other financiers in search of credit, any transaction is balanced; money merely the facilitator of it. Money is just the medium of exchange used at banks that facilitates that which balances.
Bezos, Ellison and Smith have lots of credit even without a cent to their name, while tomorrow's entrepreneurs who would like to emulate the aforementioned entrepreneurs would - absent a track record - find attaining the economy's resources a little bit more difficult at first. In short, the savings of others can often be had for something that is to some degree intangible in return: one's reputation, or in the case of tomorrow's success stories, one's perceived future potential.
Record American wealth reveals that Americans are great savers, while credit inflows into the U.S. strongly signal that American wealth extends well beyond what's in our bank and brokerage accounts. Even in our relatively depressed state, our exploits remain attractive credit risks. Imagine how prosperous we would be absent all the barriers to growth that have been erected by Republicans and Democrats over the last twelve years.
