The Greatest Savings Mirage

I remember being nine years old with a big wad of cash. In 1980, I had earned allowances over the years and was growing and selling strawberries for a profit. While my brother was a big spender, I was a big saver. I understood the benefits of saving, especially after my parents pointed out that I could make my money grow ten percent every year by putting it in the bank. I learned then that my money was valuable and banks would pay me if I could just let them borrow it for awhile.

It was hard to take all my cash to the bank. I didn’t trust them, but my parents helped me understand that it would be safe, and I didn’t have to worry. The bank wasn’t going to steal my money; it was going to pay me to borrow it. In exchange for my cash, the teller gave me a little booklet with gold letters on the front and hand writing on the inside ledger that showed my balance. The next time I went in, they added interest to my balance. The more I deposited, the greater the interest and my balance grew, until I had earned enough interest to buy my first boombox. Hooray!

Some years the interest rate went up, and I made a lot more money from the bank. I can’t remember when it started creeping down, but I really noticed it after the stock market crash of 2008. I had already done some investing and did well. But when the stock market crashed, I lost a big chunk. I wanted to put what was left in the bank again, but the interest rates were so low it didn’t make any sense. So I left it in passive mutual funds and watched it grow again over the next ten years. The stock market slowly became the new savings because everyone was jumping in.

I’m not going to outline what happened with economics, but I would like to draw your attention to two things. First, the banking business changed. Banks no longer borrow money from me or you and pay us to do so. And if that’s not their business, then you have to ask what is? Second, people are no longer using banks for savings purposes or to make money from their interest rates. They use banks for convenience and for loans, and that’s all. Now if you were like me, then you moved your money from the bank to equities which you hope will substitute for savings and beat inflation in the long run.

If you have an IRA, then you have probably watched your wealth grow enormously over the past ten years, so this “new savings” doesn’t seem so bad. But think for a moment about how your thinking has been twisted. If you’ve read any of my other posts, then you know that the dollar used to be an IOU for gold, but now you accept the IOU, backed by nothing but 22 trillion in debt, as the asset itself. Meanwhile central banks are buying more gold than ever. It also used to be that the bank paid people to borrow their money, but now you entrust the bank with your money for free. Yes, banks borrow your money for practically nothing and use your deposit to lend out ten times more (fraction reserve banking).

My point being we have been gradually brainwashed into accepting an alternate reality where banks can borrow for free and we can make money forever in the stock market. How did this happen? Well, Wall Street found a way to get into your paycheck. They convinced your employers to create retirement plans with them, and your employers convinced you to put a portion of your salary into the stock market (through a 401K or other retirement plan). Confident that mutual funds will make our money grow, we have shifted from “your money is valuable as a lending instrument” to “buy the stock market to save and grow your money.”

With unemployment at an all-time low and the majority of U.S. employees now “spending” into the stock market as a long-term “savings” gimmick, it’s a massive bubble that has grown far more than the economy. As a society, we have accepted the stock market as the new bank where most Americans can safeguard and grow their life earnings. But it’s not a bank at all, and it’s not “borrowing” your money like a bank used to do by paying you interest. It has given you ownership in companies that are full of debt and companies that buy back their own stocks to keep the prices elevated. The stock market is a huge debt bubble we take as our greatest investment. And right under our noses, it’s where all the inflation has been building. It’s no wonder the Feds are working so hard to keep it high. It’s no wonder we no longer have a free marketplace.

What I just described is the transition our society took when money stopped being “real” by being backed by something real. I’m talking about our departure from the gold standard. The dollar lost its primary function of being “a store of value” and we now await the ending of that horrendous mistake. Credit cannot go on forever because eventually the system will break between real people lending (as an investment) and real people or companies borrowing who default, and a failed economic system which collapses. This is the greatest savings mirage ever: a gigantic pile of debt that looks like assets growing by leaps and bounds because everyone has been “taught” to keep buying. Whether the economy is good or bad, their retirement funds automatically buy with every paycheck. For sure, Wall Street is having the biggest party of its life!

Another mirage is the stock market going up is NOT a reflection of a healthy growing economy. It’s the reaction of a brainwashed America on automatic. Hang in there, if you dare, but if you don’t sell before everyone else does, when the whole thing falls apart, then you’ll be left holding an empty bag, and you’ll be waiting a very long time for your savings to return. A friend told me once that the ultra rich save in three things, and three things alone: physical gold, precious art, and real estate (the most important being fertile land with a fresh water source). Of course nothing is a guarantee in the long term, but surely one of these things will retain its value in the event of a financial catastrophe.

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