those who understand the dangers of central banking, it should not
come as a surprise that the Federal Reserve's systematic debasement
of the dollar has also led to the debasement of our language (in
this case, the very meaning of saving). In turn, the debasement
of our language has led to dangerous financial behavior on the
part of the common man. What is at risk here is more than our savings
and capital formation. Nothing less than liberty is at stake here.
Let me explain.
a free-market society (which would include a 100% gold dollar),
a natural tendency would be for the prices of goods and services
to decrease over time. The beauty of a gold dollar is that, conversely,
its purchasing power would increase over time. Therefore, setting
aside part of one's money income (as savings) would be an attractive
proposition for two key reasons. First, as mentioned above, the
purchasing power of money would increase over time, thus rewarding
savings. Secondly, a bank would pay the saver interest which is
an additional reward for saving. Clearly, having a 100% gold dollar
would provide an economic environment conducive to saving.
the establishment of the Federal Reserve, in 1913, the U.S. dollar
has lost over 95% of its purchasing power. Hence, it is not surprising
that the Federal Reserve's reckless inflation has led to the common
man's expectation for the dollar to lose value over time. As the
Federal Reserve intensifies the rate at which it creates money out
of thin air, the common man's behavior (in the sphere of personal
finance) tends to change for the worse. He is led to speculate
in response to a constantly depreciating currency.
the expectation for money to lose value over time, there is a tendency
for people to seek higher rates of return than offered by passbook
savings accounts, certificates of deposit, and other savings vehicles.
During particularly acute periods of money creation by the Federal
Reserve (in the 1920s and the 1990s for example), the common man
turned to the stock market in search of higher rates of return.
However, it is clear that the common man does not understand
that his behavior had changed from being a saver to becoming a speculator.
Herein lies the key as to how the debasement of our currency has
led to the debasement of our language (i.e. eliminating the word
"speculation" from Wall Street's vernacular and ultimately
replacing it with "saving").
a quick aside, it is crucial to understand that investing is spending,
and thus the opposite of saving. Therefore, speculating falls into
the category of spending as well (perhaps reckless spending would
be a better description).
corruption of what it means to save occurred incrementally. The
first step was to eliminate the distinction between "investment"
and "speculation" in common stocks. In Benjamin Graham
and David L. Dodd's classic textbook Security Analysis, the
authors point out that: "An investment operation is one which,
upon thorough analysis, promises safety of principal and an adequate
return. Operations not meeting these requirements are speculative."
Most Americans are economically illiterate (thanks largely to public
schools) and most certainly cannot perform basic security analysis
such as reading (and understanding) a company's balance sheet and
income statement (which a true investor should be able to do). However,
Wall Street knows that people do not want to be called speculators
even though most individual investors really are. On this point,
Benjamin Graham stated (in his wonderful book The Intelligent
Investor): "…in the very easy language of Wall Street,
everyone who buys or sells a security has become an investor regardless
of what he buys, or for what purpose, or at what price, or whether
for cash or on margin." Indeed, Benjamin Graham was on to something
here. The corruption of our language can lead to reckless behavior
on the part of the common man (i.e. speculating in the name of investing).
In the same book, Mr. Graham conveyed the following warning: "The
distinction between investment and speculation has always been a
useful one and its disappearance is a cause for concern. We have
often said that Wall Street as an institution would be well advised
to reinstate this distinction and to emphasize it in all its dealings
with the public. Otherwise the stock exchanges may some day be blamed
for heavy losses, which those who suffered them had not been properly
warned against." Unfortunately for Wall Street and the ill-educated
common man, Graham and Dodd's wise words have fallen upon deaf ears.
the advent of the Individual Retirement Account (IRA), the 401K,
the Keogh Plan, and Thrift Incentive Plans, came a further corruption
of our language. All of these aforementioned investment (speculation)
vehicles have been broadly mislabeled as retirement savings
accounts. In talking to acquaintances, colleagues, friends, and
family, it is disturbing to consistently find that people think
that simply putting aside a portion of current income, to purchase
common stocks and mutual funds (for a retirement savings account),
is the same thing as saving. I know individuals who have purchased
high-tech mutual funds, aggressive growth funds (and specific stocks
such as Amazon.com and Cisco Systems) for their retirement savings
accounts. To a person, each one believed that foregoing current
consumption to speculate (by Graham and Dodd's accurate definition)
was equivalent to saving. Heck, the meaning of saving has been so
debased that some people even believe that paying down mortgage
debt is a form of saving. Indeed, Wall Street and its federal watchdog
(the Securities and Exchange Commission) absolutely refuse to use
the word speculation in its proper context. Instead, we now call
speculation "saving". Thus, the debasement of the incredibly
important word (saving) has become complete (save for the adherents
of Austrian economics).
did the problem of speculation, in internet stocks, tech stocks,
and other common stocks, reach such massive proportions? We do know
that the Federal Reserve created massive amounts of money after
the Long Term Capital Management fiasco (in 1998), and inflated
further (in early 1999) in anticipation of a Y2K disaster (thus
providing the liquidity for rampant stock speculation). Moreover,
as should be clear by now, the meaning of the word saving has been
corrupted to the point that sheer speculation has become the path
to safety, comfort, and personal welfare in the present, and in
one's retirement years. So, once again, how has the problem of speculation,
in common stocks, occurred on such a massive scale? Ludwig von Mises
provides an answer in has magnum opus Human
Action. He states (on page 46 of The
man does not speculate about the great problems. With regard
to them he relies upon other people's authority, he behaves
as "every decent fellow must behave," he is like a
sheep in the herd. It is precisely this intellectual inertia
that characterizes a man as a common man. Yet the common man
does choose. He chooses to adopt traditional patterns or patterns
adopted by other people because he is convinced that this procedure
is best fitted to achieve his own welfare. And he is ready to
change his ideology and consequently his mode of action whenever
he becomes convinced that this would better serve his own interests.
millions of Americans followed the herd into the stock market seeking
the "selfish" interest of financial security (convinced
that his money was safe as long as he was in the stock market for
the long term). The common man has been duped, by our corrupted
language, into speculating in the name of saving. Indeed, an economic
environment, dominated by an ever-depreciating currency (thanks
to the Federal Reserve), can lead to the corruption of our language
and to risky financial behavior on the part of the common man.
the economy clearly weakening and the fiat money, jet-fuelled ride
on the stock market plummeting back to earth, Americans are becoming
quite concerned about their "savings". To quell these
concerns, brokers (such as Charles Schwab) are running ad campaigns
to soothe brokerage customers' nerves with the irresponsible platitude
that your money is safe, in the stock market, as long as
you are in it for the long term (sound familiar?). Just relax, Alan
Greenspan's seven interest rate cuts in 2001 will come to the rescue.
All will be well.
the three major stock indices (the Dow Jones Industrials, the S&P
500, and the NASDAQ) regress back to their respective means, much
further financial pain lies ahead for Americans. With such pain
inevitably comes calls for government action. Perhaps the Federal
Reserve will incrementally cut short-term interest rates to 0% (just
look at Japan). Perhaps large brokerage houses will have to be bailed
out at taxpayer expense (does this smell like a justification for
tax hikes?). In the event the economy busts into a deep depression,
be assured that another "new deal" type of scheme will
be hatched in Washington, D.C. All of this will come at the expense
of further eroding our liberty.
here is a quick summary. In the pernicious economic environment
created by the Federal Reserve's continuous debasement of our money,
it is clear that a simple, yet crucial, word such as "saving"
can literally lose its meaning. In turn, it is apparent that Americans
have speculated in the name of saving. This can only lead to economic
disaster, more government intervention, and eventually, loss of
Hayek understood the extreme danger of corrupting our language.
Fatal Conceit: The Errors of Socialism, Hayek dedicated
an entire chapter (titled "Our Poisoned Language") to
this topic. He opened this chapter with a chilling quote from Confucius:
"When words lose their meaning people will lose their liberty."
Debasing the very meaning of saving may prove to be a crippling
blow to our free-market society and, thus, our liberty. For this
we can lay the blame at the doorstep of the Federal Reserve and
its inflationary policies.
Englund [send him
mail], who has an MBA from Boise State University, is a surety
bond underwriter in Bellevue, WA.