Quarterly Bulletin

 THRIFT, the extreme care in spending money and not spending money unnecessarily, is key to good management at personal and institutional level. Lack of careful spending often leads to huge debts that cannot be paid back. This has been seen in some developing countries that have had unsustainable debts. Thrift and good management of resources can be one good response to the effects of the current global economic crisis. Trevor Simumba just makes this point very clear.

In "Advice to a Young Tradesman," Benjamin Franklin, the great American Economist, Diplomat, and Entrepreneur, wrote, "In short, the way to wealth, if you desire it, is as plain as the way to market. It depends chiefly on two words, industry and frugality; that is, waste neither time nor money, but make the best use of both. Without industry and frugality, nothing will do, and with them everything."

These immortal words ring ever so true now in this age of unbridled consumption culture based on debt and more debt. We in Africa are used to debt crisis but it seems our friends in the West have now caught the bug of wasteful spending on money that does not actually exist. People on Wall Street forgot what thrift and prudence mean when conducting banking transactions and continued to feed the irresponsible behaviour of consumers and politicians who encouraged people to buy houses they could not afford and cars they did not need.

Over the past decade, in the midst of several recent financial “crises” (such as the dot-com stock market bubble, rising fuel and food prices, and the sub-prime mortgage debacle), economic experts have always checked the pulse of the American consumer to see if these “problems” were really cause  for  concern.  Some experts have continued to encourage the US President Barack Obama to come up with a huge “fiscal stimulus.” The consensus conclusion: As long as Americans keep spending, everything will eventually be okay. It does not matter if the personal savings rate goes negative. It does not matter if they have to borrow more – on their credit cards, against their homes, etc. As long as Americans keep spending, the world economy will keep lurching along, surviving in spite of Wall Street missteps, higher taxes and mortgage repossessions.

This is really the “Paradox of Thrift” and the mantra of Keynesian Economics. Instead of responsible Governments now looking closely at their expenditures, what we see is clamouring for who has the biggest fiscal stimulus package. There is need for courageous politicians who will tell it like it is and not pander to the insecurities and ignorance of the people as to what constitutes wealth.

At some point, the world must come to grips with the long-term consequences of too much spending and too little saving. People will see the increase in their monthly debt service, and the lack of growth in their nest eggs or retirement accounts, and say, “If I keep doing this, it is going to ruin me. It is time to tighten my belt, time to stop spending so much and to start saving a little more.” We need to be very prudent and frugal in our spending and only spend what we have and can afford. Whatever happened to the very good cash budgets of the Structural Adjustment Programmes in Africa? Maybe we need such austerity measures to come back.

Benjamin Franklin preached throughout his life the virtues of "industry, thrift and prudence" as universal principles of success. Undoubtedly he would castigate today’s big spenders for indulging in under saving, overspending and excessive debt. "No revenue is sufficient without economy," he warned. "A man’s industry and frugality will pay his debts and get him forward in the world.... Business not well managed ruins one faster than no business."

The crux of the matter is we are not managing our nation’s economies well. We have continued to narrow the tax base to pay for people on welfare, to subsidise un-competitive farmers around the world and we have failed to open up global trade and increase development aid under the Doha Round of negotiations. Success in the Doha Round would do much more to enhance the global economy and cost much less than the trillions that are being poured into poorly managed banks and car manufacturers.

Unlike where money that is saved had disappeared from circulation, as if it were stuffed in a mattress or buried in the backyard, most savers do not keep their savings under their pillow or in a coffee can. Rather, their savings are deposited in banks or invested in other financial vehicles to generate additional earnings. And in a way, these savings are “spent” by the institutions and businesses that receive the deposits.

Banks use their depositors’ monies to make loans. The loans allow businesses and individuals to spend, either to create more value or consume more stuff. When more people save, there is more money to lend, and then the banks would not need to be bailed out by tax payers. Unfortunately banks have been lending money they did not actually have and in the case of US banks they have been lending out money saved by Chinese, Japanese and European citizens whose countries have much higher saving’s rates than the US.

Usually when there is more of something, the price goes down – even the price of borrowing. All other factors being equal, more saving might lead to more and cheaper spending. Saving or Thrift is the catalyst for innovation and value creation. Without the financial assistance from savers and investors, new technologies remain just “good ideas.” Thus industry is not created and without industry there would be no wealth creation. The strategy of constantly borrowing to solve financial challenges ultimately exacts a painful cost, because eventually the bill has to be paid. If today’s borrowing does not result in tomorrow’s saving, there is trouble at the end of the line. Let us restructure our economies and our lives in line with three of  the wonderful “Ten Cannots” written by William J. H. Boetcker, an American religious leader and influential public speaker.

1. You cannot bring about prosperity by discouraging thrift.
2. You cannot establish sound security on borrowed money.
3. You cannot keep out of trouble by spending more than you earn.

 

Trevor Simumba
International Business Consultant
United Kingdom