Does ‘consumer spending’ really help the economy?

Lee Friday – February 28, 2017

Retail sales figures are announced and discussed on a regular basis in the mainstream media. The conventional view is that rising sales i.e. more consumer spending, is a symptom of a healthy economy. However, this view is a symptom of economic ignorance.

A Reuters article (February 22, 2017) by Leah Schnurr tells us “Consumer spending has helped underpin the economy in recent years, though that has served to drive household debt compared to income to a record high.”

That sentence contains two errors. First, consumer spending does not drive household debt. It is the other way around. Consumers borrow a lot of money to finance their consumption. Second, consumer spending does not help to underpin the economy. This is a dangerous fallacy promoted by the government, the banks, and their cheerleaders in the mainstream media. Here is another example from this National Post article (December 10, 2015): “The Liberals have argued their tax-bracket tweaks will help the country’s weakened economy, because middle earners are likely to spend what they save on income taxes.”

Production, not spending, is the key to a healthy economy. People will always spend. They do not need encouragement to do so. People must spend in order to survive. But one cannot spend if there is nothing available to buy. Goods must first be produced before someone can purchase them. Production must precede consumption. As long as producers make things consumers want, spending will always follow.

Savings is the key. People who save can loan their money to others who invest this money in more production. Thus, it is savings, not spending, which helps the economy, for without savings there can be no production, and hence no spending. This is how a healthy economic foundation is built and sustained, that is, if the government refrains from intervening in the free enterprise system.

Governments have historically intervened in the fields of money and banking, an intervention which has been particularly acute since the early twentieth century. Governments are intricately linked to banking systems to which they have granted monopoly powers. These groups want consumers to spend more, but what they really want is to encourage ‘borrowing and spending’ – and not the borrowing of savings, but rather the borrowing of new fiat money created by banks. Low interest rates tempt consumers, and banks benefit. Savers do not benefit from low rates, in fact they often lose after factoring in the inflation rate, which is a by-product of the monopolized banking system, not the free enterprise system. Moreover, monopolization of money and banking is the root cause of recessions and unemployment.

This coercive system has been lucrative for banks, politicians, and bureaucrats, and it has resulted in unfathomable quantities of unsustainable government, corporate, and personal debt. This has transformed our entire economy from one based on ‘savings and production’ to one based on ‘borrowing and consumption’. An economic foundation built on a massive, unsustainable debt load is guaranteed to produce a severe and lengthy period of economic hardship at some future date – likely not too distant.

Political intervention in the fields of money and banking was far less pronounced in the 19th century, a period of unprecedented economic growth.

All of this can be confusing if you do not have a sound understanding of money, banking, and capitalism. I have written several short essays on these topics which you can find here and here.

Is it possible to reverse the government’s intervention? Perhaps, but only if more people become informed about the issues. In the meantime, it is my sincere hope that more and more people will stop borrowing money to finance their consumption. It is time to break the habit. We must discipline ourselves to live within our means. Borrowing money sucks. Saving money rocks. Don’t let bankers and politicians tell you otherwise.

Related essay: Recessions – and – Spending Does Not Help The Economy

 

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