Some argue that America is much wealthier than it was 40 years ago, just ask your parents they say.
I will admit that I earn a lot more dollars than my parents did at my age, but taking inflation into account the average family income has been decreasing for many years.
What is going on here? How can we be gaining wealth, yet our parents income was higher than our generation?
The savings rate in America has been decreasing for many years, just as the average incomes have fallen. The relationship between savings and wealth creation seems to have been overlooked.
Most businesses, banks and families benefit a great deal from an increase in personal savings. Savings are a critical element to a capitalistic economy, because without savings, businesses cannot borrow money, hire workers and increase wealth.
How Wealth is Created
The primary goal of a prosperous economy is to increase wealth, on a personal and corporate level. Savings loaned to businesses enables them to increase the wealth of everyone involved.
The primary goal of government is to maintain law and order, so that businesses can grow the wealth of the nation without disruptions. To do that effectively, governments have to spend less money than the increase in wealth that is being created. If the government spends more money than the increase in wealth that is being created, than everyone’s wealth will decrease.
Over time, if wealth continues to decrease, everyone will become less wealthy. That is essentially what has happen over the last 40 years (since the dollar went off the gold standard in 1971). But, the government has been able to hide the truth with shifty accounting practices that are now being exposed by the recession.
People vote for elected public officials that support their programs, which in turn spend money to fund their programs. Over time, as more and more programs are funded, government spending grows past the level of wealth being created by the economy and everyone’s wealth is decreased.
Much of the problems today are because governments have grown their spending much faster than the economy is producing wealth.
How They Got Away With It
For the most part, the government has been able to get away with decreasing the wealth of our nation for decades by borrowing the savings of other nations and creating more money out of thin air by lowering interest rates (enabling more money to be leveraged and inflating assets prices) and increasing the currency supply.
The gig is just about up now that the housing bubble has burst and is threatening the entire global economy with frozen credit markets and falling asset prices. Frozen credit markets are primarily because too much money was leveraged because of low interest rates and easy credit standards.
The Real Change We Need
Obama came into office on the campaign slogan of ‘change’, but the real change that the US economy is in desperate need of is a massive reduction in government.
Both state and federal governments need to drastically reduce their spending until they are spending less wealth than the economy is creating. Then they need to continue operating mean and lean for several years until the economy can produce enough wealth to pay back the money that the government owes in debts.
I’m not sure how this revolution (as Ron Paul calls it) is going to take place. I don’t see how the majority will ever come to realize this is the real cause of the recession and take action to elected politicians to reduce the government. But it could happen as it did with Ronald Reagan.
Maybe the political leaders are going to figure this out and start cutting the government before the masses actually come to this understanding. California is starting to cut government spending, but they have also increased the taxes to help pay for their spending, which is only extracting more wealth from their economy.
The real change we need is a drastic reduction in government and government intervention in the economy. If the government intervention was reduced, we would see an increase in interest rates, which would increase the savings rate and provide new businesses the loans they need to hire workers and increase wealth.