I was recently having a dinner conversation with my neighbor. He seemed like a pretty practical guy with a car that was 13 years old and a pretty frugal lifestyle. When we talked about American indebtedness asked me why high school students are not taught financial literacy.
I didn’t have a great answer at the time. Thinking about this question some more, I came to the conclusion that it is a waste of time. You could spend effort trying to educate Westerners about the virtues of saving for a rainy day, living beneath your means, the value of investing, etc. But at the end of the day, there won’t be any results.
Everything about our economy is designed to get Americans to be good consumers and spend every dime they earn.
Central Banks keep interest rates at or near zero percent indefinitely. This encourages people to take on debt because the interest rates for loans is low. At the same time, it discourages citizens to save because any interest rate they receive from saving will be minimal.
To see the absurdity of the situation, you can look to European nations. Many countries have implemented negative interest rates. In some cases, not only do you not yield any interest but you actually have to pay the government or a bank for the privilege of loaning them money. If you borrow money, you might get paid for taking out interest. Who is going to save under these circumstances? Almost no one.
An income tax inherently also prevents savings. Money is taxed the second it is earned. A consumption tax policy would encourage individuals to save money. Saving money would be untaxed and spending money would be heavily taxed and thus it would influence decision making.
The political and social structures need people to spend and dig themselves deep into debt. Governments across the world depend on tax revenue to maintain their welfare and military spending plans.
If you want to maximize tax revenue from a citizen, how would you want them to live their life? Would you want them to be frugal, spend as little as possible, be happy with what they have, and retire early?
Of course not. You want them to compare their lifestyle to others. You want them to spend money solving problems that they think exist. My neighbors renovated their kitchen and bought a brand new car? Well, then I must have the same. And the central banks are ready to fuel these impulses with cheap money.
When you use a mortgage to get a house much larger than you actually need it is great for governments. They can now generate more property tax revenue. Spending also helps generate significant sales tax revenue. Every time you buy something there is a tax collector ready to make a profit.
Ultimately to maximize tax revenue, you want people to spend and then spend some more. People that retire produce and consume less. You don’t want them saving for retirement. You ideally want individuals to work until the day they drop dead and paying heavily taxed W2 income the entire time (rather than lesser taxed dividend or capital gains income). 401k, IRA, and HSA accounts represent tax shelters and thus individuals saving into them are not good for tax revenue. This provides steady tax revenue for Uncle Sam. Spending and debt help ensure that individuals work much longer than they need to.
If you were a politician hoping to get re-elected, you don’t really want people saving their money. When people reduce their spending, it reduces demand for goods and services.
Reduced demand for goods and services can lead to unemployment, which is bad if you are facing an election. Most people are up to their eyeballs in debt, with little savings, so they need full-time work.
Saving effectively means that an individual under-consumes today so that they can over-consume in the future. That doesn’t help the political class. Spending today helps today’s politicians. Spending tomorrow helps tomorrow’s politicians. So ideally if you want to retain political power you do not want people saving.
People that are living paycheck to paycheck are also much easier to control. They are living on the financial edge as they only a few paychecks away from bankruptcy. You can easily influence their vote with government benefits.
Someone that is financially independent and stops working tomorrow is not as easy to control. If taxes become too high they may decide to stop working. Their democratic vote is not as easy to influence with government benefits. Ultimately, the political class benefits greatly from an indebted society.
Politicians also need low-interest rates to sustain the national debt. If interest rates rise then the debt comes impossible to service.
Special Interest Groups
Businesses want people spending as much as possible. It creates additional consumer demand for their goods and services. This can yield additional revenue in terms of bonus payouts for executives.
Homebuilders depend on people leveraging up on mortgages to buy houses larger than they need. Automobile manufacturers want people to buy new cars and gorge on auto loans. Bloated universities and colleges depend on individuals digging themselves deep into student loans. Banks want loans in general so that they can yield interest. Retailers want people running up credit cards to boost sales. Restaurants want people to eat out frequently.
These special interests will lobby to do whatever is necessary to get people to spend now versus consuming later.
Policy affects decisions
My neighbor originally asked why high school teachers are not taught financial literacy. We can educate people all we want. The benefits would be dubious.
What would the point be if the policies in place are designed to eradicate savers and encourage debt? I would argue that it is pointless. The policies in place are designed to effectively ensure people do not save and invest.
The system is inherently designed to create a borrow and spend consumption-based economy with people working their entire lives. If we could somehow convince westerners to save 10% of their income, the central bankers and government entities would respond with policies designed to get people spending again. Perhaps they would need interest rates at -5% until people are spending again, but they would force the issue.
Educating individuals will not overcome the ruling class that is encouraging spending by any means necessary.
At an individual level, we must realize the powerful ruling class that is working against our own self-interest. The deck is stacked against the average joe. We must go our own way and disregard what everyone else is doing.