If you ask someone, anyone, what grows the economy chances are they’ll say spending. I am sure most of you have heard that spending accounts for 70% of all economic growth. However, the truth is it’s not spending that stimulates growth but rather savings. Well, technically its productivity that encourages growth but to increase productivity you need savings.
Why Is Savings So Significant?
Savings allows for businesses to borrow to create or buy more capital goods. Capital goods being things such as new equipment, plants, workers, things that will permanently increase overall productivity.
As depositors save their money, banks will begin to lend out money to businesses for capital investment. The capital investment will go towards increasing productivity.
Also, if the overall economy has many savings, then the rate of borrowing will be low or at least lower than usual. Let’s assume the standard rate is 5%.
However, the opposite remains true when there are fewer savings available. Rates will be higher than usual perhaps 6%, 7%, 8% or more.
Isn’t Debt Terrible For The Economy?
Debts can be bad for the economy if we spend the money on non-capital goods such as stock buybacks, lawsuits, investments, or consumer spending.
In other words, debts are beneficial if it increases productivity and generates additional revenues.
Debt Consumption Stagnates Economic Growth
The US economy is focused too much on debt consumption and not enough savings. Problem with this is that we’re sacrificing our future growth for growth today.
At some point, we will be forced to wind down the debt, causing a nationwide or global recession.
Remember it’s the savings that grow the economy, not the spending. The savings is what allows businesses to purchase capital goods that increase productivity enabling the cost of products to become cheaper.
A lower cost means lower consumer prices. As most of us know, every consumer is always shopping for the lowest price. Therefore, a substantial