We live in a world dominated by the financial clash of two titanic groups: spenders and savers. Spenders like to borrow, shop and consume until the credit card is declined. Savers enjoy squirreling away their hard earned lucre in bank CDs, savings accounts and the stock market. Spenders and savers can be coworkers, neighbors, friends and family members.
And yet these two groups are always at odds. Spenders want easy money policies. They want low interest rates, readily available credit and high inflation. These attributes are conducive to their preferred free-spending financial lifestyle. Savers, on the other hand, favor a more restrictive monetary system. They desire high interest rates, tight lending conditions and little or no inflation. These economic circumstances allow savers to reap the full reward of their saving activity.
If you are reading this article, there is a good chance you are a saver. Unfortunately, if that is the case then I have bad news for you. Since World War II the U.S. financial system has been operated in favor of spenders. The U.S. Federal Reserve and U.S. Treasury have cooperated for the last 75 odd years to ensure that inflation is always appreciably positive, interest rates don’t rise too high and credit is always accessible to both businesses and consumers alike.
There was a little bit of a silver lining for savers though. While the U.S. financial system has been generally tilted towards spenders for decades, this bias wasn’t egregious. Bank savings accounts paid interest rates above the rate of inflation. The Federal Reserve tolerated moderate inflation, but always reigned in excessive dollar devaluation. And credit availability was traditionally subject to fairly strict qualification rules. These compromises may not have been ideal for savers, but they were good enough most of the time.
And then the Great Financial Crisis of 2008-2009 hit. Bank savings accounts and CDs started paying practically nothing. The Federal Reserve, along with central banks all over the world, enthusiastically declared that they would tolerate as much inflation as they could create. And the U.S. Treasury bailed out systematically important, too-big-to-fail banks like Citibank, Goldman Sachs and J.P. Morgan Chase on the implicit condition that they make loans available to anyone who can fog a mirror. Suddenly the age old struggle between spenders and savers didn’t seem so balanced anymore. Spenders – governments, corporations and individual consumers – were the big winners while savers were left behind.
This brings us to the present. Today we live in an economy that is highly financialized, dominated by grotesquely oversized banks that feed at the government teat. Traditional investments, regardless of whether they are stocks or bonds, pay miniscule dividends or interest. And, much to our chagrin, we’ve discovered that debt is the new financial heroin of our age. But the real question is where do we go from here, especially those of us who are savers?
Unfortunately, I have more bad news for savers. Inflation is basically a form of wealth redistribution from savers to spenders. For many decades after World War II inflation was low and this process of redistribution was, consequently, slow. But in spite of inflation not being particularly high since the Great Financial Crisis, redistribution has increased in pace. This is primarily due to the fact that savers can’t earn a guaranteed return above the rate of inflation anywhere. But this uneasy stalemate between spenders and savers will not last forever.
While it probably won’t happen within the next few years, one day the United States will experience a currency crisis. I define a currency crisis as being an abrupt decline in the foreign exchange value of a country’s currency by anywhere between 50 and 90 percent. This event will shake the foundations of the international financial order. Currency crises usually happen after many years of a slowly deteriorating fiscal position. As the grandfather of modern economics Adam Smith once commented, “There is a great deal of ruin in a nation.” In fact, it is usually telegraphed for so many years beforehand that everybody assumes it won’t or can’t happen. However, when the crisis finally hits, it often unfolds faster than even the most pessimistic observer thought possible.
How can a saver protect himself? Ultimately, all wealth is physical. Central banks, financial institutions and corporations can print money, issue debt and sell stock. But none of these actions truly increases the amount of wealth present in an economy. They are dilutive, redistributive processes, effectively moving wealth from savers to spenders. The astute saver will realize this and convert much of his hard earned money into tangible assets. Whether those assets consist of bullion, real estate, commodities or fine art and antiques is largely a matter of personal preference. What is important is that you do it while you still can. The final destination of a debt saturated economy is always a currency crisis and the clock is ticking for the United States. Art, antiques and other tangible assets are a great way to protect yourself.
