I.O.U.S.A - Addison Wiggin [83]
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Interviews
more comfortable with. It hasn ’ t happened yet — savings excluding capital gains is actually very low, close to zero. Ordinarily, over the years that is 5, sometimes as much as 10 percent. I don ’ t think we ’ re getting back to 5 or 10 percent immediately, but I do think as the wealth effect as a substitute for savings begins to diminish, our savings rate will start to rise signifi cantly.
Q: Why is a lack of savings problematic? How would you explain that to someone who thinks, “ I ’ m living pretty well and I have my 401(k) and everything seems fi ne ” ? What does a lack of savings create in the long term?
Alan Greenspan: When you think in terms of the economy as a whole, you have to realize that if the output of an economy — or in household terms, the amount of income [available] is all consumed, [then] we ’ re not accumulating the types of assets which we fi nd productive over the years. Every advanced economy invests a signifi cant amount of what it produces. It ploughs it back in the way of capital assets — meaning factories, equipment, all forms of capital — which essentially make the standard of living rise, because as technology and capital increase, an hour ’ s worth of effort on the part of a person has (over the generations) been increasing, producing more and more in the way of goods and services. So that the issue is, for the national economy overall, unless you plough back or invest a signifi cant part of your production, you will not have growing standards of living.
The comparable measure with respect to households is that if you don ’ t save adequately, you are wholly dependent upon the income you are getting — which, incidentally, indirectly will rise because other people are saving and investing. But as far as you ’ re concerned, unless you put money away for nest egg purposes, for retirement, for a variety of other purposes, you will fi nd that you are living an extraordinarily precarious existence. Savings is the buffer which is the gap between disaster and prosperity.
Q: Let me follow up with the criticism or critique of someone like Dr. Ron Paul who says that Americans don ’ t save for two reasons. One is because they choose not to, and another is c13.indd 170
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because there ’ s a false sense of wealth. Many Americans feel richer than they actually are, and Dr. Paul would say that he would lay some of that blame at the foot of the Federal Reserve.
You ’ ve probably heard this before from him personally. How do you respond to that? Does the Fed play any role in the last 10 or 20 years in the falling savings rate?
Alan Greenspan: By maintaining a stable fi nancial system, a stable monetary system contributes to economic growth through enhancing stability and, most importantly, keeping infl ation at a subdued level. The issue of rising wealth in the last 15 years or so is essentially a global phenomenon and one that results because of the consequences of what was seen when the Cold War came to an end. The extraordinary amount of economic devastation behind the Iron Curtain induced a very large part of the so - called Third World to move signifi cantly toward competitive market capitalism, the effects of which are twofold: (1) a major decline in the rate of infl ation, and (2) a huge increase in the propensity to save around the world, but most dramatically in those areas of the world which ordinarily save a great deal but were saving increasingly more. The effect of that was a major decline in long -
term interest rates, which in turn have always had the effect of lowering capitalization rates on real estate, commercial, and on stocks and bonds, obviously. As a consequence of that, there is a sense of wealth, because the concept of wealth is not the physical things that we have per se, but what human beings perceive that those assets will eventually be able to contribute to future standards of living.
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