Smith reminds us that, ‘Capitals are increased by parsimony, and diminished by prodigality and misconduct. When ever a person saves from his revenue he adds to his capital.’ In other words, money is made by careful and thrifty accumulation plus employment, not reckless and lavish wastefulness.
DEFINING IDEA…
Wealth can only be accumulated by the earnings of industry and the savings of frugality.
~ JOHN TYLER, TENTH US PRESIDENT
Another banking innovation with serious consequences was ‘home equity’—the difference between the current value of a property and the outstanding balance on a mortgage. As house prices rose, this created ‘accidental millionaires’ and billions were made available to eager homeowners keen to cash in on their appreciating asset. Only by ‘drawing down’ cash from their Home Equity Loan (HEL), they effectively handed their asset back to the bank through escalating debt. Because the bank held the asset as security, they didn’t much care what people spent their money on. While some used the cash to add value to the asset, many did not. Their HEL may have allowed homeowners that holiday of a lifetime but the consequence was financial purgatory. Security in later life was replaced with mortgage obligations stretching way past retirement when the ability to meet those obligations would cease.
Based on current economic statistics, it’s not just the word that is old-fashioned: parsimony implies financial thrift and care - concepts that seem alien to Western societies. According to the Office of National Statistics, UK households saved just 1.1% of their income in the first quarter of 2008, the lowest figure since 1959. A faltering economy and high inflation certainly contributed to the sharp fall in savings. In the US, figures demonstrate that, starting in 2005, households have consistently spent more than they make for the first time since 1933.
An aversion to saving is not shared in China, however, where employees regularly save up to half their salary. This has led to significant Chinese investment in US Treasury bonds, resulting in China’s ‘nuclear option’. At the time of writing, China owns over $400 billion (or over 20% of the US debt), leaving America increasingly vulnerable to financial warfare, a political tactic that America is more than familiar with.
In 1956, US allies UK and France were engaged in battle against Egypt over control of the Suez Canal. Meanwhile, Russia threatened to intervene on Egypt’s side. Desperate to avoid military action, the US requested the Allies withdraw. When they refused, the US - who at the time owned much of the UK debt - threatened to cut Britain’s credit supply. Within weeks, all UK and French military forces withdrew from the region. Similarly, China now has the US by the financial short and curlies with ‘nuclear’-sized consequences.
HERE’S AN IDEA FOR YOU…
According to the Yorkshire Building Society, the average Briton’s savings would only last fifty-two days if they were unable to work. A staggering 36% would last eleven days! Work out just how long your current savings would last if you were unable to work. If the figure scares you, then do something about it. Cut back on unnecessary spending and try to increase your income.