The following article is speculating on the future, shouldn’t be taken too seriously, and definitely shouldn’t be considered ‘advice’ or guidance in any way.
Global events may cause us to save more, and that’s bad.
From March 2020 until now, a shockwave launched in uncertainty has advanced almost everything already in motion. In the world—our country, economy, communities, and families—we’ll be unpacking lockdown baggage for generations.
The everyday punter, lemonade makers, and opportunists alike made massive gains as the masses gazed on with envy. Some lost and some won; most had both, learned a lot, but now wonder, ‘What next?’. This might be you, the everyday investor. Zooming out and looking at the global story, it’s more nuanced but still apparent. In aggregate, the world’s changing. It’s already changed.
In the midst of a global event most of us had never seen before, we were scared, and we expected governments and banks to step in and do all they could. They did. Households were able to set money aside, even some for the very first time. Low interest rates and the odd government handout, was exactly what we asked for, but we now know it wasn’t what we needed. We have inflation now because too much money was created out of nothing, and it was spent on too much nothing too.
And let’s go there with wars and rumors of wars too. This increases uncertainty even more. Households save more when they’re scared. They spend less. They borrow less. Governments borrow more at the same time, though. In essence, the cash withdrawn from circulation is offset by the fresh funds the central bank lends to the government through complex, non-transparent shell games like bond purchasing.
I’m painting a picture which you’ve heard before, but think about it differently: On the one hand, savings is the ‘seed’, which can be used to justify the creation of more credit in the economy. This is the ‘fractional reserve’ view on banking. You can’t have banks lending money into existence without the savers taking a token sample of money out of circulation. Unless, of course, the central bank changes the rules: Then you can do anything. Savings and debt reduction extinguish currency in circulation in the economy (like blood pressure, a falling supply of currency deflates activity). Think about it another way: Entropy also tells us something about how molecules behave. As density goes down, molecules have more space to spread out, and this can often mean they move around at a slower pace. Savings reduces consumption, which reduces employment, which deflates or slows down the economy, which accommodates more credit creation in the areas that central planners desire.
When Western central banks move in unison, this is how we fund a war machine.
There’s a reason why monetary resets (Bretton Woods, Nixon and the gold standard) are highly correlated to global instability, but that’s where healthy speculation gets dark.
If this sounds a bit plausible, but you’re not sure on a few moving parts, you can learn how a debt-based economy works by checking out this amazing video by Ray Dalio.
When banks lend a rate that’s faster than what an economy can produce (GDP), the economy overheats, or we reach critical ‘tipping points’. As public and private debts grow, borrowers are more sensitive to interest rate changes. We increasingly spend less during credit contractionary times (like in 2023), and we’ll spend far more when things ease up too. Giddyup, but just hang on tight from here!
Remember, a debt-based economy, needs constant credit creation. If it’s not housing, it’s government spending, or it’s war – it’s always something. There is no alternative.
We need to borrow, and not save. Why? It’s for the greater good.
What do you want to blow up: House prices, or the world?
Our only choices are to save and borrow, and the interest rate unelected central banks set, influences what we do.
Why is this relevant? Governments will need to borrow more during a war:
1 – This increases the inflation problem, which
2 – Creates a need to raise interest rates, so that
3- Resources can be reallocated to the war machine.
You and I don’t want this of course, but doesn’t it become about the greater good again?
So what good is saving then? If we can hang on to our assets, and savings equips us in this pursuit, then that’s what it’s for.
Then again, like in wars in the past, which were followed by financial resets, isn’t saving a redundant exercise and potentially a risky bet?
Maybe we don’t need savings if money isn’t worth anything or worse, confiscated. Like Doc from back to the future, ‘Roads? Where we’re going, we don’t need ‘roads’’.
Perhaps more money in a savings account isn’t something we’re going to consider ‘safe’ when we get back to the future. If returns on savings accounts rise too much, then somewhere, somehow, there’s a bunch of risk we’re being incentivised to take. That’s the lesson crypto markets taught us in 2022 with the collapse of FTX, Celsius, and Voyager. When the rate we receive on savings account appears too good to be true, maybe that’s because you’ve been drawn into a Ponzi scheme!
Of course, this isn’t financial advice; it’s a mental handstand. It’s a thought experiment. You shouldn’t be alarmed. Do what’s right for your own circumstances. Whatever you do based on fear, , remember that’s what everyone else is doing. Maybe the crowd’s right, but maybe not.
That brings us full circle. Global events may cause us to save more, and that’s bad.
Really? In what future world is that true?