Treating an inebriated alcoholic with another drink is known to be counter- productive.
Yet even though we are “inebriated” now by consumer debt, we persist in piling up ever more lOUs. The consequences, as with the alcoholic, will be a terrific hangover.
The following information illustrates what is happening.
The increase in consumer debt from 2006 to 2009 in Canada was 34%; in the United States it was 66%.
The annual compound rate of increase in Canada is 8%, and in the United States, 14%.
Consumer debt relative to personal disposable income in Canada is 143%, and in the United States 193%.
The savings rate in Canada is 4.6%, and at the end of the year it turned negative. In the United States it is 3.9%, which historically was about 10 to 15%.
While many are uncertain what were the causes of the 1929 Great Depression, we have seen that it was characterized by the tremendous and long-lasting collapse in capital formation, in housing, manufacturing plant and equipment, commercial building and in the accumulation of inventories. A paralysis afflicted the economy.
Basic economics teaches us that saving and investment are inextricably linked. Saving is the release of resources from consumption; investment is the employment of those resources in making capital. Thus, every act of investment requires an increase in saving and a decrease in consumption. Without investment our economy simply cannot expand.
Clearly, we are borrowing from our future by our lack of saving and our reckless, unsustainable additions to consumer debt.
The rate of indebtedness precludes future investment. We need to encourage saving and investment, so capital gains taxes should be cut because they adversely affect that chain of events.
The repercussions of ignoring this problem are frightening.