The P.A.

A weekly address from Patrick Adams,
President of St. Louis Community Credit Union

Are Our Eyes Bigger Than Our Bellies?

On March 12th, 2012, posted in: Uncategorized by

If you’re a saver, then you have been taking it on the chin for the good of the team – that “team” is the American economy.  Rates have been at extraordinarily low levels as a means by which to entice the Joneses to get out and spend/borrow some money.  You see, 70 percent of the American economy is comprised of me and you spending cash, not saving it.

Quite frankly, if you’re a prudent saver, you have been punished for many years – more than just the past few.  Some argue that your return on investment has been taking it on the chin for up to a decade.  Sadly, when we do analysis that is “inflation-adjusted,” the pain is that of a knockout punch right to the jaw.  For the past couple of years, the “inflation-adjusted” short-term rates have been in the range of minus 2 percent for the first time since the 1970s.  So if you’re saving money, you’re losing ground.  That should raise some eyebrows, right?

Now, on the other side of the fence, some folks have greatly benefitted from the low rates.  They have been able to borrow or refinance their debts at much lower rates, especially homeowners.  At the individual consumer level, borrowers win and savers lose.  And at the federal government level of the economy, we may be headed for the likes of Greece and Italy.  That is to say, a mess of biblical proportion may be looming on the horizon.

See, the guy at the end of the street isn’t the only one borrowing at ridiculously low rates.  So is the Federal government.  Because the Fed has reduced Treasury yields to paying returns somewhere equivalent to “two rocks, a marble, a paper clip and a piece of gum,” Federal borrowing costs are much lower.

So, Congress and the President must be introspective and ask the hard question: Is the Federal Reserve the great enabler?  Is there a false sense of security in the near-term benefit of the unusually low cost of borrowing money?  Is the country’s fiscal policy disguising itself as sustainable and smart to borrow at such low rates, or is there a big roundhouse sucker punch coming from out of nowhere that’s going to blacken the eye of our future economic well-being?

Can we get this on the docket for legislators to sit and discuss?

Here’s the deal from where I am sitting.  Long-term growth of our economy comes from saving money.  Prosperity is rooted in savings and investment, not in spending.  More than a bushel basket of economists and scholars have testified before Congress for decades that saving money is the best thing we can do.

As a result, low rates for borrowers may not turn out to be what we had hoped for. Low costs of borrowing fool us into believing we can borrow more than we should.  My dad use to refer to this as “your eyes being bigger than your belly.”

People a lot smarter than me need to be thinking about this.  Yes, we have problems today, but we also have tomorrow to think about.  And there are lots tomorrows out there.

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