Tag Archives: Kahneman

Hitler’s SS and Investing; Jim Rogers’ Interview; What Is Inside Banks?

Snowman

Daniel Kahneman on Life and Investing (Interview)

http://www.forbes.com/sites/steveforbes/2013/01/24/nobel-prize-winner-daniel-kahneman-lessons-from-hitlers-ss-and-the-danger-in-trusting-your-gut/

Buffett’s Favorite Valuation Metric:

http://pragcap.com/buffetts-favorite-valuation-metric-surges-over-the-100-level

Quant. Value: http://abnormalreturns.com/qa-with-wesley-gray-co-author-of-quantitative-value/

 

What is Inside Banks? What is inside Americas Banks

An excellent article by The Atlantic. The article explains why some banks trade under tangible book value. Investors do not trust the balance sheets of the banks and therefore do not trust the reported earnings.  If the banks had truly cleansed themselves of rotten loans and assets, our economy would be growing faster but thanks to intervention, we slog on.

Yet, don’t let that stop you from studying WFC: Wells Fargo Notes

and visit The Brooklyn Investor

Legendary Jim Rogers: Brokers Going Broke, Farmers Will Become Rich – Very Rich!

Jim Rogers is a renowned international investor. In 1973, he co-founded the Quantum Fund with George Soros. After a fantastically successful decade, he retired to travel the world. He is the author of Investment Biker: On The Road With Jim Rogers and A Bull in China: Investing Profitably in the World’s Greatest Market, among other books. He also runs the Rogers Global Resources Equity Index. Recently Rogers sat down with Steve Forbes to talk about why the global economy is moving to Asia, where he’s putting his money and what the U.S. can do to right the ship. Video and a transcript of their conversation follows.

Steve Forbes: Jim Rogers, thank you for joining us.

CSInvesting Editor: I like his cantankerous, contrary nature.

Jim Rogers: My pleasure.

Forbes: Let’s go through a little bit of history. You teamed up in the early 1970s with George Soros. Had a great fund, got out in the early 1980s. Quickly recapture what you did and how you did it at such a young age.

Rogers: Well, we had a successful ten years. I didn’t want to wake up at 75 and still be looking at a computer screen. I’d always wanted to have more than one life, so off I set to have more than one life. And I’ve had more than one life. I retired. I was 37. And set off to have more than one life.

Forbes: Any motorcycle trips in the offing? Any more books on the exotic places of the world?

Rogers: No. I went around the world in a car, 1999 to 2001, and I really haven’t been on a motorcycle much since then. It grieves me that you ask, because some of the finest times of my life were on motorcycles, including the trip around the world on the motorcycle. But now I’m doing other things. I’ve got two little girls. I’m living in Singapore, which is not a great motorcycle place. Now I’m doing other things.

Forbes: I can’t imagine you speeding there.

Rogers: No, no. I mean, the speed limit is 90 kilometers an hour! It’s not a great motorcycle place.

Forbes: Not to be negotiated.

Rogers: Right, and not negotiable. You’re right. Exactly.

Forbes: Talking about Singapore, when you moved there you decided to have three dates:  1807, you’d move to London. 1907, you’ve got to go to New York. 2007, you’re in Asia, specifically Singapore. Why?

Rogers: Well, the 20th century was the century of the U.S. The 19th century was the century of the U.K. The 21st century will be the century of Asia, and it’s becoming more and more evident. And especially of China. I wanted my children to grow up knowing Asia and speaking Mandarin. I think the best skills that I can give two girls born in 2003 and 2008 is to know Asia and to know Mandarin. So there we are. I couldn’t do it in New York. I tried. I tried doing it in New York. But it was not possible. So there we are.

Forbes: What do you see as the problem with the U.S.?

Rogers: The main problem is the staggering debt. We are the largest debtor nation in the history of the world, Steve, as you undoubtedly know, because you probably read Forbes. It’s amazing how high the debt is, and it’s going up by leaps and bounds. It’s just mind boggling how fast it’s going up. Nobody seems to understand or care what the significance and the consequences will be. It’s not good. It’s not good news.

Forbes: In the past, we’ve had some rough periods – I remember the malaise of the 1970s – and the U.S. has come back. You don’t see that happening again? Are we just digging the hole so deep we’re not going to be able to get ourselves out?

Rogers: There will be rallies. The U.K. in 1918 was the richest, most powerful country in the world. There was no number two. In three generations, they were bankrupt. Now in that period of time, they had some rallies, as you well know. They won the Second World War, for instance. So they had some big rallies. But basically, they were in decline.

I would like to think that there’s something which is going to save us. I can think of some things which will give us rallies. But I cannot see anything – I mean, look at Japan. Japan has staggering internal debt. They still are externally a creditor nation. They still have a balance of trade surplus. We’re the largest external debtor nation in history and the largest internal debtor nation in history. We’ll have rallies. But Steve, I don’t see what can cause us to repeat, perhaps, the ’70s. We’re in relative decline. Maybe you would like to debate that. I don’t think so. I don’t see that that relative decline will stop.

Forbes: Now in terms of investing, commodities. You have the Rogers Global Resources Equity Index. You don’t see the dollar eventually getting strong again? Do you think commodities replace –

Rogers: I actually own the dollar. I actually own the dollar, as we stand here. I bought the dollar 15-16 months ago. 17.

Forbes: That’s just a bear market rally?

Rogers: It’s a bear market rally, yes, in my view. Although when I walk out of here, I may buy more. No, I don’t see it as anything more than a bear market rally. But I own several currencies around the world. There may be a time, Steve, in the foreseeable future, when all of us are going to be getting rid of our paper money, because it’s being debased all over the world. One reason I own the dollar is because everybody’s panicked about the debasement of these other currencies. Paper money is suspect.

Forbes: So it’s just the best house in a bad neighborhood?

Rogers: I’m not even sure it’s the best house in a bad neighborhood. But it’s a good house in the bad neighborhood, for the moment.

Forbes: Getting back to commodities, what makes you bullish on commodities?

Rogers: Well, there’s been a huge dearth of investment in productive capacity for 30 years now. The last lead smelter built in America was built in 1969. No gigantic elephant oil fields discovered since the 1960s. I could go to agriculture. Steve, you should start an agriculture magazine. Because the profits in agriculture –

Forbes: Share with us the observation you made about somebody majoring in public relations and agriculture.

Rogers: Well done. More people in America study public relations than study farming. We have no farmers. You went to Princeton; nobody you went to school with became a farmer. I went to Yale; nobody I went to Yale with became a farmer. The average age of farmers in America is 58 years old. In Japan, the average age is 66. In Australia, it’s 58. Hundreds of thousands of Indian farmers commit suicide every year. It’s a disastrous business. In the U.K., the highest rate of suicide is in agriculture. It’s been a horrible business for 30 years. Prices have to go up – have go to up a lot – or we’re not going to have any food at any price.

Unless you’re going to become a farmer.

Forbes: Then we truly starve. But you pointed out we have 200,000 PR graduates, 20,000 farmers coming out of our schools. And you have a wonderful phrase, “You can’t eat press releases.”

Rogers: That’s exactly right. You cannot eat press releases. It was actually 200,000 M.B.A.’s we have coming out. That’s even worse. We have more people doing M.B.A.’s than doing PR.

There’s going to be a huge shift in American society, American culture, in the places where one is going to get rich. The stock brokers are going to be driving taxis. The smart ones will learn to drive tractors so they can work for the smart farmers. The farmers are going to be driving Lamborghinis. I’m telling you. You should start Forbes Farming.

Forbes: In the 1970s, we heard the same thing, and it didn’t happen. Why?

Rogers: Well, farmers did make a lot of money in the 1970s.

Forbes: And then lost it all in the ’80s.

Rogers: Yeah, but it actually started before. That’s my point. These things go in cycles. There has never been any bull market which has lasted forever. No bull market in the history of the world has lasted forever. These commodity cycles come and go. On average, they’ve lasted 18 to 20 years in the past. I have no idea how long this will last. But it’s not over yet.

Forbes: Thoughts on gold? You were suspicious in the late 2011, not without reason. Where does that go from here?

Rogers: Well, I own gold. I’m not selling my gold. I’m not even hedging my gold, at the moment, although I’m thinking about it. Gold’s up 11 years in a row, which is extremely unusual, as you know, for any asset class. It’s correcting right now. I would suspect it’s going to continue to correct.

There are some things going on in the world. The Indians are coming down hard on gold, and they’re the largest consumer of gold in the world. So it may continue to correct. If so – if it goes down further – I hope I’m smart enough to buy more. To buy a lot more. The bull market in gold is not over yet, Steve.

Forbes: Now going back to Asia, China. You have not been a big fan of stocks. You are of the currency. How do you play China now?

Rogers: The best way to play China is commodities, because they have to buy commodities. If you’ve got cotton, they will take you to dinner, they will pay for your dinner and they’ll pay you on time. You don’t have to worry about corporate governance or any of that kind of stuff. They don’t care who the head of The Federal Reserve is if you have cotton. Because cotton is its own world. And many other commodities, as well.

I own the Renminbi, as well. It’s a good way to play China. I don’t buy Chinese shares, except when they collapse. They collapsed last in November of 2008. I bought more Chinese shares. If and when they collapse again, I’ll buy more. My Chinese shares are for my children. They’re not for me.

Forbes: Now looking at China itself, can they become (as the U.S. has been) an innovative economy instead of a catch up economy? Are they going to do the real value added stuff? Do you see the changes coming on that?

Rogers: The first time I went to China, 25 or 30 years ago, there was one radio, one TV, one newspaper, one way to dress, one everything. That’s changed dramatically, as you know. In China now, they produce something like, I don’t know, 20 times as many engineers every year as we do. They didn’t in the past. It was a very closed and traumatic society and autocratic society. That’s changing rapidly.

I suspect, yes, some of these engineers are going to turn out to be hotshot engineers. I don’t know when. I don’t know where. But China has a long history of entrepreneurship and capitalism. They’ve been disastrous, at times, in their history. But they’ve also been spectacularly successful, at some times in their history. So teach your children Mandarin, teach your grandchildren Mandarin.

Forbes: You’re not a fan of India?

Rogers: No, no, no. I’m short India as a matter of fact. I love to go there. If you can only visit one country in your life, Steve, for whatever reason, I would urge you to go to India. There’s nothing quite like it from a tourist point of view. But as far as a bureaucratic maze, it’s the worst bureaucracy in the world. They don’t like foreigners. They don’t like capitalists. They don’t like people making money. It’s a fabulous country to visit, but I wouldn’t try to do business there.

Forbes: So what’s happening in high tech is just an outlier?

Rogers: Yeah, very much so. You can probably name four or five companies – I doubt if you could name four or five, I could probably name two or three high technology companies. Steve, there are a billion people in India. We hope that somebody’s successful. And most of the outlying outliers that are the successful Indians that you know live in Europe or America. There are very few great success stories in India itself. There are. They exist. Out of a billion people, of course.

Forbes: Japan? Are they ever going to get out of this rut?

Rogers: I own the currency. And when they had the tsunami, I bought shares, as a matter of fact, as they collapsed. It’s always been a good thing to do when there’s a huge natural disaster. It’s usually a good thing to do, to buy into the market. I doubt in five years I will own them. I doubt if I’ll own the currency or the shares. Japan’s got staggering problems. They’ve got the highest internal debt in the world and they’ve got a declining population. They’ve got serious problems.

Forbes: Talking about debt, India’s piling on debt, too.

Rogers: I know. That’s why I’m short India. That’s one reason I’m short India – because they’ve got this huge debt. For some reason there are all these bulls walking around that don’t seem to understand that India has a debt to GDP ratio of 90%. They’re still bullish. They don’t do their homework.

Forbes: You going into Myanmar?

Rogers: I’m extremely optimistic. If I could put all of my money into Myanmar, I would. I cannot, because you and I are citizens of the land of the free. In the land of the free, we cannot invest in Myanmar. Everybody else can. The Japanese, everybody’s pouring into Myanmar, except all of us from the land of the free.

It is so exciting. It is like going to China in 1978; it’s exactly the same place. It might be more exciting, because it’s been such a disaster for 50 years and now they’re opening up. They’re right between India on the left, China on the right – huge natural resources, 60 million people, disciplined, hard work, educated. Oh my gosh, it’s such an exciting opportunity. But all you and I can do is I can read about it in Forbes. I can’t do anything.

Forbes: Where else are you doing things?

Rogers: Well, the other place that I see wildly exciting things is North Korea, but we can’t do anything there. There’s no market in North Korea either. But there’s going to be a merger soon of North and South Korea and that’s going to be a very, very exciting place. Then you’ll have a country of 75 million people, right on the border of China, huge labor pool, lots of natural resources in North Korea. They’re going to run circles around the Japanese. The reasons the Japanese don’t want it to happen is because they don’t want a huge new competitor. They got their own problems.

North Korea, I wish I could find – I’m looking for ways to invest. I have a couple of ways. But they’re not of great interest. These are the places that I find the most exciting. But as far as stocks, for the most part I’m short stocks. I don’t own many stocks in the world. I own commodities. I own currencies.

Forbes: Vineyards?

Rogers: Not in vineyards. No, that’s a good idea. I don’t own any. No, I don’t own any vineyards. No, I drink the stuff, I don’t grow it. It takes too long to grow it, so I’d rather drink it.

Forbes: So to sum up, the U.S. – long term, secular decline.

Rogers: Certainly relative secular decline. There’s no question about that. We may have a lot of oil. When the U.K. had a big rally, went bankrupt in the ’70s, it had a big rally because the North Sea oil started flowing. I know Margaret Thatcher takes credit for it – it was the North Sea. North Sea oil started flowing in 1979, the same year Margaret Thatcher came to power.

If you give me the largest oil field in the world, I’ll show you an extremely good time, as you can imagine. We may have the largest oilfield in the world, with all this oil shale and natural gas, shale gas if they can solve the environmental problems. That would cause a huge rally in the U.S. We’re very good at agriculture or have been. That could cause a big rally in the U.S.

So don’t give up on the U.S. I own the dollar. I’m a U.S. taxpayer, U.S. citizen. So don’t give up on the U.S. But I’m afraid it’s nothing more than a secular rally, because we’re the largest debtor nation in the world and nobody cares, except me and you. I know you care. But other than the two of us, nobody seems to care.

Forbes: So why aren’t you running for president?

Rogers: No, no, no.

Forbes: Might do better than I did.

Rogers: No, that’s why I’m not. Because I know I wouldn’t. And second of all, you think I want to spend my time being nice to people I don’t want to be nice to? You tried that. I can’t imagine it’s a lot of fun, going out day to day being nice to people you don’t want to be nice to. I don’t want to do that.

Forbes: Jimmy, thank you.

Rogers: Thank you, Steve. Good fun, as usual.

 

 

Free Resources on Value Investing; Kahneman Podcast on Uncertainty; Apple; Reader’s Questions

I’m sorry, if you were right, I’d agree with you.–Robin Williams

CAPATCOLUMBIA

Free Value Investing Course Work here: www.Capatcolumbia.com

Kahneman Podcast on Uncertainty

Professor Kahneman uses a variety of examples to discuss the inside/outside view, statistics and stories and prediction. (1:02:45). This radical pessimist says, “The world makes more sense to us than it really is.”  Excellent Podcast! http://www.thoughtleaderforum.com/default.asp?P=909655&S=945705

Other interesting lectures as well at www.thoughtleaderforum.com

Key takeaway: As a value investor when investing in a franchise with a winner take all market-BE PATIENT.

Federal Reserve Lectures

Bernanke Lectures on the Federal Reserve: http://www.federalreserve.gov/newsevents/press/other/20120126a.htm

Counterpoint to Bernanke’s Lectures: http://www.economicpolicyjournal.com/2012/01/march-madness-bernanke-versus-rothbard.html

Austrian Value Investor, Jim Rogers

A value investor who incorporates “Austrian” economics into his investing: http://en.wikipedia.org/wiki/Jim_Rogers

The State of America Today

Oglala Sioux, Russell Means gives a State of the Union Address. http://www.economicpolicyjournal.com/2012/01/russell-means-endorses-ron-paul.html  More informative than Obama’s recent address to the nation last week. Forget the Paul endorsement and instead ask as an investor–if change occurs at the margin, does the Patriot Act and Obama’s recent rejection of the Keystone Pipeline (http://www.washingtonpost.com/opinions/obamas-keystone-pipeline-rejection-is-hard-to-accept/2012/01/18/gIQAf9UG9P_story.html) raise the cost of capital for American companies in general (P/E multiples become compressed).

Russell Charles Means (born November 10, 1939) is an Oglala Sioux activist for the rights of Native American people. He became a prominent member of the American Indian Movement (AIM) after joining the organisation in 1968, and helped organize notable events that attracted national and international media coverage. The organization split in 1993, in part over the 1975 murder of Anna Mae Aquash, the leading woman activist in AIM.[1]

Greenwald Student Discusses Apple’s Success

From his email: This is what Greenwald will probably say, which is partly true. But you can put anything to his framework (once successful), and say that is their core competency.

1. Apple’s core expertise is in design, and they extend this design to all products.

2. They don’t manufacture the hardware. They assemble them and wrap it in a much better design. Everything that goes into the hardware, CPU, Hard disks, Memory is not made by them.

3. They do software – some of it, like the OS, etc. They don’t do everything. Even steve jobs says, Focus, Focus, get rid of the things that we don’t want. He gave the Google guys the same advice. Don’t become like Microsoft – don’t try to do a lot of things. Stick to four or five things.

You can also think about Steve Jobs as someone who has come and reduced the inefficiencies. I mean when each person has three/four devices that he can access information from – it will be so much better if someone integrates the content. If you take a picture, and you can seamlessly see it on your iPad, Itouch, Mac, Apple TV (not yet released), customers would benefit. Same applies to email, contacts, etc. (rather than taking a usb stick and moving it around all the time).

They are creating products where there is a need like any entrepreneur.

Reader Question on Real Savings

In ”Other Views on Inflation and Stocks” section from this post:http://wp.me/p1PgpH-kz, the Mises links talk about the pool of real savings. What is the author referring to? Does the real pool of savings track real changes in the exchange of goods and services?

My reply: Not exactly……see below. Savings is not the transfer of REAL goods and services being exchanged back and forth, but the postponement of present consumption for the future.

 Why Government Data on Saving is Misleading

The nature of the market economy is such that it allows various individuals to specialize. Some individuals engage in the production of final consumer goods, while other individuals engage in the maintenance and enhancement of the production structure that permits the production of final consumer goods.

We suggest that it is the producers of final consumer goods that fund — that is, sustain — the producers in the intermediary stages of production. Individuals who are employed in the intermediary stages are paid from the present output of consumer goods. The present effort of these individuals is likely to contribute to the future flow of consumer goods. Their present effort however, does not make any contribution to the present flow of the production of these goods.

The amount of consumer goods that an individual earns is his income. The earned consumer goods, or income, supports the individual’s life and well-being.

Observe that it is the producers of final consumer goods that pay the intermediary producers out of the existing production of final consumer goods. Hence, the income that intermediary producers receive shouldn’t be counted as part of overall national income — the only relevant income here is that which is produced by the producers of final consumer goods.

For instance, John the baker has produced ten loaves of bread and consumes two loaves. The income in this case is ten loaves of bread, and his savings are eight loaves. Now, he exchanges eight loaves of bread for the products of a toolmaker. John pays with his real savings — eight loaves of bread — for the products of the toolmaker.

One may be tempted to conclude that the overall income is the ten loaves that were produced by the baker, plus the eight loaves that were earned by the toolmaker. In reality, however, only ten loaves of bread were produced — and this is the total income.

The eight loaves are the savings of the baker, which were transferred to the toolmaker in return for the tools. Or, we can say that the baker has invested the eight loaves of bread. The tools, in turn, will assist at some point in the future to expand the production of bread. These tools, however, have nothing to do with the current stock of bread.

While the producers of final consumer goods determine the present flow of savings, other producers could have a say with respect to the use of real savings. For instance, the toolmaker can decide to consume only six loaves of bread and use the other two loaves to purchase some materials from material producers.

This additional exchange, however, will not alter the fact that the total income is still ten loaves of bread and the total savings are still eight loaves. These eight loaves support the toolmaker (six loaves) and the producer of materials (two loaves). Note that the decision of the toolmaker to allocate the two loaves of bread towards the purchase of materials is likely to have a positive contribution toward the production of future consumer goods.

The introduction of money will not alter what we have said. For instance, the baker exchanges his eight saved loaves of bread for eight dollars (under the assumption that the price of a loaf of bread is one dollar).

Now, the baker decides to exchange eight dollars for tools. This means that the baker transfers his eight dollars to the toolmaker. Again, what we have here is an investment in tools by the baker, which at some point in the future will contribute toward the production of bread. The eight dollars that the toolmaker receives are on account of the baker’s decision to make an investment in tools.

Note once more that the tools the toolmaker sold to the baker didn’t make any contribution toward the present income — that is, the production of the present ten loaves of bread. Likewise, there is no contribution to the total present income if the toolmaker exchanges two dollars for the materials of some other producer. All that we have here is another transfer of money to the producer of materials.

Obviously, then, counting the amount of dollars received by intermediary producers as part of the total national income provides a misleading picture as far as total income is concerned.

Yet this if precisely what the NIPA framework does. Consequently, savings data as calculated by the NIPA is highly questionable.

The NIPA Follows the Keynesian Model

The NIPA framework is based on the Keynesian view that spending by one individual becomes part of the earnings of another individual. Each payment transaction thus has two aspects: the spending of the purchaser is the income of the seller. From this it follows that spending equals income.

So, if people maintain their spending, they keep income levels from falling. And this is why consumer spending is viewed as the motor of an economy.

The total amount of money spent is driven by increases in the supply of money. The more money that is created out of thin air, the more of it will be spent — and therefore, the greater the NIPA’s national income will measure (see Figure 2). Thus, an increase in the money supply on account of central bank policies and fractional-reserve banking makes the entire calculation of the total income even more questionable.

Since this money was created out of thin air, it is not backed by any real goods; income in terms of dollars cannot reflect the true income. In fact, the more a central bank pumps additional money into the economy, the more damage is inflicted on the real income. As a result, money income rises while real income shrinks.

Real Savings mentioned http://mises.org/daily/3640

Is there a glut of real savings? Money is not savings: http://mises.org/daily/1882

Good and bad credit: http://mises.org/daily/3151

From Frank Shostak: Do People Save Money?

Is it true that individuals are saving a portion of their money income? Do people save money?

Out of a given money income, an individual can do the following:

he can exchange part of the money for consumer goods;

he can invest;

he can lend out the money (i.e., transfer his money to another party in return for interest);

he can also keep some of the money (i.e., exercise a demand for money).

At no stage, however, do individuals actually save money.

In its capacity as the medium of exchange, money facilitates the flow of real savings. The baker can now exchange his saved bread for money and then exchange the money for final or intermediary goods and services.

What is commonly called “saving” is nothing more than exercising demand for the medium of exchange (i.e., money). This means that people don’t actually save money but rather exercise demand for it. And, when an individual likewise exchanges his real savings for money, he in fact only increases demand for money. The money he receives is not income; it is a medium of exchange that enables the individual to secure goods. In the absence of final consumer goods, all of the money in the world would be of little help to anyone.

My reply: The extent to which an individual will save is explained by his time preference. Savings is deferred consumption. Deferred consumption allows for resources to be used for longer stages of production which should boost productivity.

Read chapter 14 in Capitalism especially pages: 622-651.

For a graphical discussion of real savings read Man, Economy and State pages: 367 to 451 and 517 to 521.

I will speak to a real Austrian economist this week and ask what are REAL savings and see if I can give you a more concise answer.

Another Reader Question:

Also, let’s say that we have a world currency (dollars) and a world Federal

Reserve. If money is dropped from a helicopter into a jungle and every dollar is picked up by a group of 10 individuals, then those 10 individuals would benefit from essentially receiving free money, correct? Their savings would increase and they could use their new found money to purchase capital goods. Society as a whole would lose because REAL savings and REAL capital goods and services exchange would not increase. There would be more money in circulation chasing the same amount of goods, which would cause prices to rise and/or the value of the currency to decline? Does that sound correct?

My reply: Yes, they would benefit as would any counterfeiter would benefit spending the money first before prices can adjust fully. The gain of the early beneficiaries is matched by the losses in real purchasing power of the people who are the last to receive the money AFTER prices have adjusted.  You are correct that real savings would NOT increase. In fact, the structure of production is thrown off which in the end hurts society (boom and bust) in addition to the unfairness of inflation. The money printing distorts production causing mal-investment which depletes REAL savings.

Frank Shostak comments: Consider the so-called helicopter money case: the Fed sends every individual a check for one thousand dollars. According to the NIPA accounting, this would be classified as a tremendous increase in personal income. It is commonly held that, for a given consumption expenditure, this would also increase personal savings.

However, we maintain that this has nothing to do with real income and thus with saving. The new money didn’t increase total real income.

What the new money has done is set in motion the diversion of real income from wealth generators to the holders of new money. The new money that the Fed has created out of thin air prompts exchanges of nothing for something. Consequently, wealth generators have less real wealth at their disposal — which means that the process of real wealth and savings formation has weakened.

In the helicopter example we have a situation in which, for a given pool of real savings, an increase in nonproductive consumption took place. (By nonproductive consumption we mean consumption that is not backed up by the production of real wealth.) This means that the real savings of wealth generators, rather than being employed in wealth generation, is now being squandered by nonproductive consumption.

From this, we can also infer that the policies aimed at boosting consumer spending do not produce real economic growth, but in fact weaken the bottom line of the economy.

In the NIPA framework, which is designed according to Keynesian economics, the more money people spend, all else being equal, the greater total income will be. Conversely, the less money is spent (which is labeled as savings), the lower the income is going to be. This means that savings is bad news for an economy.

We have, however, seen that it is precisely real savings that pays — i.e., that which supports the production of real wealth. Hence, the greater the real savings in an economy, the more are the activities that can be supported.

What keeps the real economic growth going, then, is not merely more money, but wealth generators — those who invest a part of their wealth in the expansion and the maintenance of the production structure. It is this that permits the increase in the production of consumer goods, which in turn makes it possible to increase the consumption of these goods.

Only out of a greater production can more be consumed.

Can the State of Savings be Quantified?

What matters for economic growth is the amount of total real savings. However, it is not possible to quantify this total.

To calculate a total, several data sets must be added together. This requires that the data sets have some unit in common. There is no unit of measurement common to refrigerators, cars, and shirts that makes it possible to derive a unified “total output.”

The statisticians’ technique of employing total monetary expenditure adjusted for prices simply won’t do. Why not? To answer this, we must ask: what is a price? A price is the amount of money asked per unit of a given good.

Suppose two transactions were conducted. In the first transaction, one TV set is exchanged for $1,000. In the second transaction, one shirt is exchanged for $40. The price, or the rate of exchange, in the first transaction is $1,000 per TV set. The price in the second transaction is $40 per shirt. In order to calculate the average price, we must add these two ratios and divide them by 2. However, it is conceptually meaningless to add $1,000 per TV set to $40 per shirt. The thought experiment fails.

The Real Culprit

Rather than attempting the impossible, as far as calculating real savings is concerned, one should instead focus on the factors that undermine real savings. We suggest that the key damaging factors are central bank’s and government’s loose monetary and fiscal policies.

These policies are instrumental in the weakening of the process of real savings formation through the diversion of real savings from wealth generators to non-wealth-generating activities.

The US economy has been subjected to massive monetary pumping since early 1980 via the introduction of financial deregulations. The ratio of our monetary measure AMS to its trend jumped from 1.17 in January 1980 to 3.5 in July 2009. (The trend values were calculated by a regression model, which was estimated for the period 1959 to 1979, the period prior the onset of financial deregulations).

Likewise, the US economy was subjected to massive government spending. For the fiscal year 2009, US federal government outlays are expected to stand at $3.5 trillion.

The outlays-to-trend ratio (the trend was estimated for the period 1955 to 1979) jumped to 4.1 in 2009, up from 3.5 in 2008 and 1.45 in 1980.

The ever-expanding government outlays are also depicted by the federal debt, which stands at $11.6 trillion thus far into 2009. Against the background of massive monetary pumping and ever-expanding government, we suggest that this raises the likelihood that the pool of real savings could be in serious trouble.

That this could be the case is also suggested by the private sector debt-to-its-trend ratio. This ratio stood at 5.8 in first quarter, against a similar figure from the previous quarter. The ever-rising ratio raises the likelihood that the increase in the private sector debt is on account of nonproductive debt. Real savings, instead of funding wealth generating activities, have been supporting non-wealth-generating activities. This weakens the ability of wealth-generating activities to grow the economy.

We can conclude that, given prolonged reckless fiscal and monetary policies, there is a growing likelihood that the pool of real savings is in trouble. If our assessment is valid, this means that US real economy is likely to struggle in the quarters ahead.

In addition, if the pool of real savings is under pressure, none of the government and central-bank policies to lift the economy is going to work. Note that as long as the pool of real savings is holding its ground, such policies appear to be effective. In reality, though, it is the expanding pool of real savings that drives the economy — and not various stimulus policies.

Conclusions

According to latest US government data, the personal saving rate jumped to 4.6% in June this year after settling at 0.4% in June last year. We suggest that on account of an erroneous methodology, the so-called “saving rate” that the government presents has nothing to do with true savings.

Since early 1980s, the ever-rising money supply and government outlays have severely undermined the process of real savings formation. As a result, it will not surprise us if the US pool of real savings is in serious trouble. If what we are saying is valid then it will be very hard for the US economy to grow, for it is a growing pool of real savings that makes economic growth possible.

Furthermore, the growing pool of real savings is the reason that loose monetary and fiscal policies appear to be working. In reality, however, all that these loose policies achieve is a further depletion of the pool of real savings — thus reducing prospects for a genuine economic recovery.