May as well start with a quote from Mises, emphasis mine:
Every single performance in this ceaseless pursuit of wealth production is based upon the saving and the preparatory work of earlier generations. We are the lucky heirs of our fathers and forefathers whose saving has accumulated the capital goods with the aid of which we are working today.
In simple English, wealth production, meaning a higher standard of living for everyone, needs savings to get started. In a modern well functioning economy, if Jones puts some money in the bank, that money is lent by the bank to some businessman who knows what to do with it. He may buy more or better machinery, hire more workers, and thus produce more than before.
Now that we are in a recession, what we need more than ever is savings, so that businessmen have what to work with to create productive jobs.
Let’s quote Henry Hazlitt on this subject:
“Economic growth,” higher real wages and living standards, are possible only through new capital formation.
He means we have to make more and better machinery, that can make more and better stuff at the same or lesser price.
Might as well quote another line that drives this idea home:
And the rate of true “economic growth” is in effect the rate of capital formation.
And where is this capital formation going to come from? From savings, of course.
OK, let me say right here that this understanding of basic economics is critical, and is also the opposite of what the mainstream, blinded by decades of Keynesian brainwashing, thinks. So let me quote from an earlier article that lays this all out, and compares it with the mainstream idea that we need more spending, not more saving.
At this point, I wish to introduce my good friend, Mr Devil’s Advocate [=DA]. I give him the floor, and we will start a dialogue.
DA: OK, we got it. Build more machines. But where is the money going to come from to do that? Everybody’s broke, remember? That was the problem in the first place.
SD: Let me quote Bohm-Bawerk on that:
“To complete the act of forming capital it is of course
necessary to complement the negative factor of saving with
the positive factor of devoting the thing saved to a produc-
tive service. . . . [But] saving is an indispensable condition
to the formation of capital.”
DA: Sorry Dave, I don’t get all that fancy talk. You won’t be able to mumble your way out of this one.
SD: What he’s saying is very simple. If you need money, tighten your belt and save up. You will have to underconsume for a while, putting your nickels and dimes in the piggy bank, until you have enough saved up to buy those new machines.
DA: Now wait just a minute. That’s treasonous. You’re saying that the way to get rich, to end a recession, is to not spend as much?
SD: You got it.
DA: But that’s just the opposite of what everyone else is saying. They all are talking about how we have to spend more. You are saying we have to spend less.
SD: Not spend less, consume less. Saving is really a form of spending, spending on capital formation. The idea is, buy one less hamburger today, put the money in the bank. The bank will lend the money to some clever business man, who will use it build a better, cheaper, mousetrap.
DA: But that’s ridiculous. If we consume less, the stores will obviously not make as much profits. They will buy less from the factories. The factories will have to stop making as much, meaning they will have to fire people. You are advocating that we increase unemployment.
SD: Do we have any choice? Stuff is being made we cannot afford. Obviously we have to stop making it for a while, because no one will buy it.
DA: But you are creating a downward spiral of unemployment and poverty. And you think that’s how we will get rich again?
SD: Actually, the idea is not to have unemployment, but to move the workforce from one part of the economy to another. Instead of working at places that make things nobody wants, they will find jobs where the money is now supposed to be going. They will be hired by that clever businessman who borrowed the money from the bank to improve his business.
DA: I get it, sort of. We are poor, and have to do all the responsible adult things that we hate to hear about to climb out of it. But there’s one piece of the puzzle that eludes me. How does the guy making a better mousetrap make us all richer? I see how he personally might get rich, but how will that help li’l ole me?
SD: He provides jobs, and he provides better, cheaper, mousetraps. And it’s not just mousetraps, of course. It’s everything we want and need.
Bottom line, the only way to recover from a recession is to increase production [which will automatically create jobs, of course], and the only way to increase production is by saving.
And where does QE3 fit in? Very simple. QE3 discourages saving. Bernanke declared that the goal of QE3 is to get interest rates down to zero. Will that mean people will not put their money in banks anymore? That’s exactly what it means, as Bernanke explicitly confessed when he announced his stupid QE3. In other words, QE3 is striking a blow at the very root of our recovery and our prosperity, saving.
Now Bernanke mumbled something about how people can always gamble on the stock market instead, a statement that is beneath contempt. Not to mention that since QE3 causes inflation, that too discourages saving. Why save your money if it loses value every day?
So there you have it. One more danger of QE3, possibly the most critical one.