This Mineweb article on India raising import taxes on gold and silver has some interesting quotes in this respect:

“…this hike will discourage imports … that is what the government wants, since imports have made a huge dent in India’s growth story and growth seems to be flagging”

“The shift away from financial savings to something which will just lie in lockers around the country could be a large contributing factor to lower growth…”

“Another expert with a nationalised bank pointed out that money locked up in the yellow metal effectively disappears from the economy to become jewellery or sits idle in cupboards and bank lockers.”

“Money spent on gold is practically wasted and it is also excluded from the financial intermediation system. Imports needed to be curbed.”

“The massive jump in gold imports has also led to an increase in current account deficit.”

No surprise that most of this plays on the “gold is useless” meme. In actual fact I agree with that. One’s savings are better invested in productive businesses and entrepreneurs rather than an inert metal.

However, what the financiers, technocrats and politicians don’t get is that movements into gold are a clear signal or vote by savers that the economy is crap. The solution is not to block the signal, but to solve the underlying problem. Actually the way to solve it is to get out of the way and stop fiddling with the economy but that would put them out of a job I suppose.

What these guys are doing is taking painkillers so the pain in their chest won’t bother them. Then they’ll all be surprised when they get a heart attack. Indeed, money flowing into gold is painful. That’s the point.

CVS
The drug store chain is offering a free $10 gas gift card to ExtraCare Rewards members when they purchase $30 worth of select
products. The promotion runs through August 28, so there’s still plenty of time to cash in.

KROGER AND SHELL
The grocery chain has been offering discounted gas for quite awhile now, but their partnership with Shell has really turned up the
savings. With 100 points on your rewards card, you’ll get 10 cents off per gallon on a fill up at both Kroger and Shell stations. If you’re
not satisfied with that discount, Kroger also offers $1 off per gallon when you earn 1,000 points on your rewards card.

KELLOGG’S
Do you eat a bowl of cereal every morning for breakfast? If so, you’re well on your way to saving on fuel. When you collect 10 UPCs
from cereal boxes and mail them in, Kellogg’s will send you a $10 prepaid gas card. Submissions must be received by December 31 and there’s a limit of five cards per household.

WAREHOUSE CLUBS
Big warehouse stores like Costco and Sam’s Club keep popping up all over the place. While they typically have some of the lowest gas
prices around, a fill-up still requires a membership. Joining the club can be done for around $50, so if your car guzzles gas, the long-term savings are worth it.

Gas discounts aren’t the only way to save, though. Here are a few more general savings tips to help you travel for less this summer.

GIFT CARDS
Gift cards are becoming a currency all of their own. Cards for popular fuel stops like Shell can be bought and sold at sites like
GiftCardGranny.com. Also, with merchants like Wal-Mart reducing gas prices for the summer, a discount Wal-Mart gift card can really compound the savings.

LOW OCTANE GAS
Unless you’re driving a top of the line sports car, premium gas probably isn’t necessary. Most cars on the road will perform just fine
with lower octane gasoline and it’ll save you a couple of bucks on a fill.

SLOW & STEADY
If you want to save some extra money, let up on that lead-foot for just a little while. Driving at high speeds and starting and stopping
quickly burns more fuel.
RESEARCH
Instead of waiting to hit the pump until you’re down to the last drop, plan your purchase in advance. Websites like GasBuddy.com
will help you find the lowest local gas prices. They even have a mobile app to help you save on the go.

RIDE SHARING
A combination of frugality and going green has led to a resurgence of carpools. If you’re trying to track one down, websites like
eRideShare.com and CarpoolConnect.com are useful resources for both drivers and riders.

PUBLIC TRANSPORTATION
As long as you’re not still in high school, riding the bus probably isn’t as torturous as you remember. If public transport isn’t an
option, you can always dust off the old bicycle. It costs next to nothing to maintain and it’ll get your blood pumping better than a cup
of coffee in the morning.
SHOP ONLINE
The easiest way to save on gas is to just stay at home. Most shopping needs, including groceries, can be satisfied online which keeps you from burning gas outside in the blazing heat.

As some of you may know I recently earned my degree from the Copenhagen Business School and on that occasion I also produced a thesis which I’d like to share here.

This thesis is built upon two core arguments. The first is the notion that the demographic transition should be narrated through the perspective of ageing rather than population growth and the second is that ageing on a macroeconomic level represents a strong driver of international capital flows. These two arguments are used to discuss the standard prediction in a life cycle framework that ageing leads to dissaving in the aggregate and thus how old economies should tend towards running current account deficits. Using Japan and Germany as the subjects of analysis, this thesis develops the idea that rapidly ageing societies are not, in the main, characterized by dissaving but rather by the fight against it. Finally, a small empirical exercise acts as a perspectivation on the results to suggest why ageing might lead to a reliance on exports and foreign asset income to achieve growth and what this means in a global context.

In many ways, the ideas, thoughts and arguments that have gone into this work are shaped by the discussions and the activity here at this space and my interaction with the people I have come to know through my online presence. In this way, it is only apt that I present it here I think.

I believe that works such as this (and any other academic/economic piece of research) should be judged on two separate accounts. One is its contribution to the methodology, discourse and lingo of its specific academic field which in my case is international macroeconomics and the second is on its contribution to the more market and policy oriented aspect of its topical sphere which in this case is the international economy and in particular global current account imbalances. I believe my thesis has something to offer on both accounts.

On the first, I will immediately disappoint the purists in announcing that my thesis does not develop a new model although I believe there are clear pathways from the arguments for anyone who likes to tinker with neo-classical modelling. In stead, I think there are two important points that I would like to emphasize as future reference and working points for my academic colleagues.

The first is that economists need a much more broad and dynamic theory of demographic changes than is the original idea of a demographic transition. In my thesis I present this through an attempted coup de grace of the notion that demographic changes should be seen through the perspective of population growth. As an alternative I propose a focus on population ageing. In itself this is not controversial and is already an inbuilt narrative in many (if not most) macroeconomic studies that deal with demographic change [1]. However, my aim here is more fundamental. What I consequently want to establish is the simple fact that the demographic transition is not over and not only that, it is non-linear and path dependent. Once we realize this, it opens up a whole new area of research in which macroeconomics is fused with anthropology and life course theory (sociology) in a way which I believe is crucial in order to truly understand what the macroeconomy, as we tend to call it, actually is.

Second, I raise and discuss the issue of dissaving as a function of old age. Specifically, I imply (although I do not show formally) that what may appear obvious on the microeconomic level may not be so obvious on the macroeconomic level. In other words, there is a an aggregation problem [2] here and it is exactly tied to the fact that while dissaving may seem imminently rational and inevitable in a microeconomic perspective it is not all obvious to me why societies as a whole should want to dissave in the context of persistently low fertility rates and rapid population ageing. Realizing that dissaving will at some point be a binding constraint for e.g. an economy such as a Japan in which ageing simply continues relentlessly, I develop the idea that rapidly ageing societies are not, in the main, characterized by dissaving but rather by the fight against it which has come to represent the key proposition of my thesis. I show this in relation to Germany and Japan as the two oldest economies in the world and try to build frame of reference on which to examine and judge other economies who will inevitably move in the same direction as these two economies.

Finally, and on the second overall account it is with no hesitation whatsoever that I claim how my thesis goes a long way to frame the Gordian knot currently facing the global economy as it exits its worst recession since the great depression. In short, if ageing economies find it difficult to create growth based on domestic demand and momentum and if they are reluctant to rapidly dissave into a very uncertain future where they would rely on foreign credit, the logical consequence is that they must be dependent on exports to grow. Now, the onset and path of this export dependency may vary from country to country, but in a world where all economies are ageing and where, worryingly, a large host of economies are converging to very low levels of fertility, it creates an obvious and practical problem. Who is going to run the deficits to match the desired level of savings of all these ageing economies?

Naturally, not everybody can export at the same time but just take a look at the discussions currently characterising the global economy. Everyone who is claiming a recovery is claiming one on the basis of growth in external demand, but this obviously cannot be true. So, you get the trade wars between China and the US, you get internal squabbles in the Eurozone over whether Germany should sacrifice its competitiveness and just how Greece, Spain etc are suppose to pay down their debt while seeing some form of growth at the same time. All this is about a lot of economies feeling the real and future pressure of deleveraging while only a few brave souls dare to proclaim that they seek growth through domestic sources. Something has to give and one obvious result will be lower trend growth quite simply because there will be lower accumulation of debt either because the capacity to pay off debt has shrunk or because the current level of liabilities disallows any further rapid debt accumulation. However, another consequence will also be an externality represented this higher level of desired external savings present in so many economies at the same time and behind it all, as a the underlying current, I believe is demographic change and how it affects the working of modern capitalist systems.

So, am I going for an early catch of the nobel here?

Hardly and thus the thoughts above represent my attempt to take the conclusions of my work as far as possible (and possibly way too far) on an overall conceptual level. Consequently, if you care to leaf through the thing, you will see lots of concrete empirically rooted points and arguments which are more down to earth than the barrage you have just worked your way through above.

In the end and because of my desire to continue my studies on a PhD level, I have (unconsciously I think) written my thesis with an open end and with many strings that can and should be picked up later. This is naturally what I hope to do in the future. For now, I invite you to have a look and by all means do not read it all, but you may just find some it interesting. Comments of all kinds are naturally welcome.

—

[1] – After all, it goes back to the idea of a life cycle and more formally the notion of overlapping generations which are two classic methodological concepts in macroeconomics.

[2] – Aggregation problems are not new of course and have haunted macroeconomic representative agent modelling for a long, long time. However, I think that the specific issue in the context of the life cycle in many ways represent the original sin in the context of aggregation problems (but I may be wrong here).

Popular myth and, allegedly, the laws of aerodynamics have it that the bumblebee should not be able to take flight. Yet still, our good bumblebee refuses to be pulled down by such details and year after year it takes flight as if nothing has happened. This allegory applies, with some imagination, to Japans economy too. Year after year it consequently appears able to simply ramp up domestic debt to cover the shortfall of domestic demand at the same time as low investment demand, a savvy export sector, and a strong net foreign asset position mean that Japan does not have to rely on foreign investors to finance government debt outlays. Together with a central bank stuck in perpetual QE mode due to persistent deflation this has so far constituted the core of Japan’s bumblebee moment.

Recent comments and analysis however suggest that while the bumblebee should certainly continue to enjoy the ability to defy gravity, Japan’s time just may be up. In particular two pieces of research authored by Societe Generale’s Dylan Grice (see here and here) as well as a recent piece by Kenneth Rogoff have added to the concerns that Japan may be headed for a Greek party of their own. In reality of course, the sudden focus on Japan is a direct function of the change in market discourse since end 2009 and the focus on government debt sustainability and how to rein in fiscal policy (if at all). Thus it is only logical to expect the great eye of the market to also turn to the biggest sovereign debtor in the world which just happens to be the oldest (demographically speaking) too.

In order not get confused here is Grice himself;

To recap, the thesis I outlined back in January 1 was that since Japanese households (the biggest effective drivers of JGB demand) are set to dis-save in coming years as they retire (left-hand chart below) there will soon be no one left to finance the government’s nosebleed deficits at current yields. Indeed, the chart below suggests households are already running down assets. And because the interest rates which might attract international investors will inevitably blow up the budget (debt service is already 35% of government revenues at existing yields) there is a very clear and present danger that the government reverts to the well- established historical precedent for cash-strapped governments of currency debasement.

As you can see, the issues here are complex but intellectually they are hugely important since what happens in Japan may tell us a lot about what will happen in other ageing economies such as, most notably, Germany but essentially a whole host of OECD economies (and China) who are set to move in the same direction as Japan. In this sense, I should immediately admit that on an intellectual level I agree with almost everything Grice says and especially his focus on Japan and the nature and extent of dissaving.

But, and in order not to make this into a fan letter, I am going to quibble a little bit with Grice in what follows.

Firstly, and on a very specific point, the chart (in Grice’ last note) which shows how Japanese households are actually running down their assets does not fit with the picture I get from my data (BOJ).

Now, I certainly don’t want to start the chart wars II here and obviously, there are many ways to define the stock of savings which might prove me as wrong as Grice is right (and vice versa). What is certain is that the incremental flow from household saving (if any) will not be enough to offset the incremental flow of bonds issued by the ministry of finance. This leaves the crucial role of corporate savings which is quite high in Japan and which also seems to be responsible for the Japan’s external surplus (on the trade balance at least).

Yet, in order not depart down the path of reinventing the wheel I will immediately refer to my most recent notes on Japan and this in particular in which I butt heads with the FT’s Martin Wolf on exactly the issue of (dis)saving in Japan and the distinction between corporate and private savings. Essentially then, this is a question of perspective and timing since I agree with all parties involved here on, at least, two accounts. Firstly, Japan government finances in an extraordinarily bad shape and the future ability of Japan to ever hone up to its liabilities is very, very slim. Secondly, dissaving is very likely to become a binding constraint in Japan at some point which would epitomized by how Japan would need to borrow from foreigners in order to finance an external deficit. In this case, and I agree with Grice here, it is game over.

But how we get from here to there may be just as important as what happens when we get there. In fact, yours truly have just defended his master’s thesis on exactly this topic and the overall conclusion, which fits quite well in the present discussion, is as follows;

Ageing societies are not, in the main characterised by aggregate dissaving but rather by the fight against it.

While my thesis councillor did indeed like the entire ouvre he was none to happy about this one. And can can you blame him? Isn’t it almost tautology? As I did on my day of graduation I will stand my ground and argue that it isn’t.

The crucial issue in my opinion is the change in perspective from waiting for the inevitable pop in Japan, Germany etc to a look at the main characteristics of an ageing economy such as Japan, Germany [1] and soon others. In a nutshell, these sum up to a deeply export dependent economy which exactly manages to keep the boat afloat because of higher domestic savings than merited by domestic investment demand and thus an external surplus. Naturally, and as a very important aside, Japan also has its own central bank who has been in QE for the better part of two decades and thus serves to allow government debt to grow without Japan needing foreign money.

This perspective provides us with two very important pieces of insight I think. One is that a rapidly ageing economy will not be able to revert to a growth path characterised by external borrowing and thus a net contribution to the unwinding of global imbalances. The second is that the global process of ageing becomes an externality to the whole global macroeconomic system because it puts more and more economies in a situation where they need to maintain external surpluses in order to prevent the forces of dissaving or, more accurately, the slump in internal demand as ageing pushes up the dependency ratio.

Now, think about the discourse we are having exactly at this point in time. It is a perfect mirror on the two points above with the added spice, in the context of the Eurozone, of how economies embarking on internal devaluation are also forced to find growth based on external demand because whatever growth they were able to generate from domestic activities in the first place are now being effectively choked off.

Moving back into the real world, Grice believes that Japan’s time may just be up and he specifically points to the fact that Japan needs to roll over 213 trillion while at the same time, the biggest holder of Japanese government bonds has openly announced that it has no inflows with which to suck up extra JGB supply.

I honestly don’t know whether he is right. He may be and if so, Japan will stand as a poster example of just how an ageing economy can take it before it folds in on itself in the sense of trying to maintain a modern market economy that is. However, I am inclined to call him on his bet and in this sense I am much closer to Buttonwood’s take on the situation;

(…) the huge amount of Japanese debt rolling over this year need not be a problem. Investors will simply recycle their existing holdings. Takahira Ogawa, a sovereign analyst at Standard & Poor’s, thinks there is more scope for the Bank of Japan to buy government debt, as central banks have done elsewhere.

Of course, such measures just postpone the evil day. The crisis will surely arise when Japan becomes dependent on foreigners for finance, or if a sharp rise in inflation or a sudden slump in the currency causes domestic private investors to take fright. But since the country is still running a current-account surplus, the yen is trading at 90 to the dollar (compared with 124 in June 2007) and deflation is forecast for the rest of the year, the apocalypse seems unlikely to occur in 2010.

Thus I would point to the continuing surplus in the corporate sector, the fact that households are not yet drawing down their deposit base, and most importantly; the fact that the BOJ has every right and reason to continue keeping the QE taps open as long as deflation is running at +2% on an annual basis. In fact, here is one of the other feedback loops from ageing right here; namely that as domestic demand simply spirals downwards, the economy gets caught in a deflationary trap (the liquidity trap in monetary policy circles) which only serves to push up domestic government debt thus forcing the central bank’s hand on QE and making it even a larger imperative to maintain an external surplus.

However, before I myself try to emulate the bumblebee by defying gravity with another complex argument, I think I will hold off with this one for another day.

—

[1] – See this excellent piece by Edward which exactly touches on a similar issue in the context of Germany. ]]> http://www.citizeneconomists.com/blogs/2010/03/17/japan-defying-gravity/feed/ 0 http://www.citizeneconomists.com/blogs/2009/08/25/provident-living-principles/ http://www.citizeneconomists.com/blogs/2009/08/25/provident-living-principles/#comments Tue, 25 Aug 2009 11:50:25 +0000 Trace Mayer http://www.citizeneconomists.com/blogs/?p=1750 Many people feel tremendous stress regarding financial matters and this often has detrimental effects on their relationships and is one of the leading factors for divorce.  Like a doctor who elucidates an extremely negative diagnoses I somewhat dread explaining The Great Credit Contraction to people because of the massive effects it is having upon . . . → Read More: Provident Living Principles]]> Many people feel tremendous stress regarding financial matters and this often has detrimental effects on their relationships and is one of the leading factors for divorce.  Like a doctor who elucidates an extremely negative diagnoses I somewhat dread explaining The Great Credit Contraction to people because of the massive effects it is having upon both the individual and the world.  When I do take the time to explain it I am usually asked:  What should I do?

Of course, the answer is unique to every individual based on their utility calculation but I think it is important to understand the different forces at work in the finance universe, have tools to measure your own financial vital signs and then build solid, healthy and strong personal financial statements as you enjoy the quality of life you desire.  Important principles to understand are (1) opposites, (2) self-sufficiency for survivalism in the suburbs and (3) preparation.

The American consumer has begun to strengthen their financial statements with a tremendous increase in the savings rate.  While this is good for the American consumer it will continue to weigh on revenue, earnings and the general economy because of the nature of the debt-based monetary system.

YIN AND YANG

At the heart of many branches of classical Chinese philosophy and science is the concept of yin and yang.  The yin and yang is used to describe how seemingly disjunct or opposing forces are interconnected and interdependent in the natural world and give rise to each other in turn.  According to the philosophy yin and yang are complementary opposites within a greater whole. Everything has both yin and yang aspects which constantly interact and never exist in absolute stasis.  An excellent example in Western culture is Star Wars with the Jedi among the Light side of the Force and the Sith among the Dark side of the Force.

So likewise in finance this principle of opposites is present:

FINANCIAL VITAL SIGNS

In financial accounting there are a few basic ratios that are used to analyze financial health.  Applying the principles behind these ratios to your personal situation can be extremely helpful in measuring your financial health.

Of course, this presumes you keep financial statements which I doubt the vast majority of Americans do, in written format, which is a primary reason they are in their current situation.  One of the reasons the American consumer based economy has been shattered to pieces is because of the weakness of their balance sheets.  Even worse is that most American’s neither know nor understand the true state of their financial health.

Companies usually issue annual financial statements and therefore assets and liabilities are generally divided into current or long-term.  To distinguish current from long-term the standard is whether the transaction comes due within one year.  Three important ratios are:

1. Net worth which is assets minus liabilities.

2. Current ratio which is current assets divided by current liabilities.

3. Debt-to-equity ratio which is total liabilities divided by stockholder’s equity.

Because most individuals go through monthly financial cycles, such as paychecks, rent, mortgages, cell phone, cable, insurance, etc. I recommend shortening the standard for distinguishing current assets and liabilities from long-term; perhaps use 1, 3 or 6 months as the standard instead of a year.

The use of these ratios for financial vital signs will give a quick snapshot of your overall net worth, liquidity and leverage.  You can quickly build a spreadsheet using Google Docs and have most of this automatically calculated.

IMPORTANCE OF GOLD AND SILVER

The FRN$ has no definition, is an illusion and merely a figment of people’s imagination.  Do you know the answer to what is a dollar?  The owner’s of FRN$ are guaranteed no purchasing power.

By contrast, an ounce of silver or half of a gram of platinum will purchase approximately 2-4 gallons of gasoline or a nice steak dinner and with tools like GoldMoney you can even pay for the good or service with the physical bullion as the currency.  I recommend gold as the unit of account for the most accurate mental calculation of value.  Also, you will need to determine your own gold standard.

EARNED VERSUS PASSIVE INCOME

Work is a wonderful activity which can lead to personal development.  Sometimes work can interfere with one’s satisfaction, happiness and lifestyle balance.

When designing one’s lifestyle there are many risks that responsible people plan for by using instruments such as life or fire insurance.  The failure to plan can lead to financial destruction.  So likewise it is wise to plan one’s financial situation to include not only earned income but also passive or residual income.

Passive or residual income are earnings an individual derives from a rental property, dividends, interest payments, limited partnership and etc. in which he or she is not actively involved.  If part of your income is derived from passive or residual sources then should you become incapacitated through injury or disease, decide to take a cruise around the world, etc. then your income would not cease.

Therefore, I think it is important to distinguish between earned and passive income when measuring one’s financial vital signs.

NET WEALTH

You can buy gold with time through your labor but you cannot use your gold to buy time because time moves on wings of lightening never to be returned.  Likewise as Randy Pausch observed in his Last Lecture, “We do not beat the Reaper by living long but by living well.”  When your financial condition is extremely solid then you can pursue those hobbies, activities, etc. that will bring you the fulfillment you seek.

Net wealth is a function of three variables, (1) number of months, (2) standard of living and (3) without ‘working’.  To determine your ’standard of living’ you need to examine your current expenses to determine your total monthly expenses.  Once your passive income or passive cash-flow exceeds your expenses then your net wealth can approach infinite but keep in mind that managing your financial condition will always require some of your time and attention.

PERSONAL APPLICATION

Every individual will need to determine whether they want to measure their financial vital signs and what values they want to seek.  As with our physical vital signs there is no one that cares as much about them as ourselves and each of us intuitively knows the true state of our condition.

Being fairly conservative, extremely debt adverse and having an affinity towards sound money, cash-flow investments and self-sufficiency my ratios may be different than others who may have less financial responsibility.  I recommend (1) a positive net worth, (2) a current ratio greater than 10, (3) a debt-to-equity ratio below 10% and (4) net wealth in excess of 24 months.  Achieving these type of financial vital signs may require significant discipline but it is possible.

There are many benefits such as the freedom to live location independent, protecting your financial privacy and personal privacy, having control over who, when and where you interact with others, etc.  You also will have much more margin for error and not be in the financial condition of many Americans of being two paychecks away from insolvency.  How stressful!

The issue is not whether working 100 hours a week as an investment banker is better than doing yoga, scuba diving in exotic caves or playing with grandchildren.  Everyone has their own preferences.  The issue is having the personal freedom and financial soundness to be able to do what you want, when you want, with whom you want and where you want.

CONCLUSION

The American consumer increasingly stressed over monetary matters and the economy.  This is changing behaviors as evidenced by the rising savings rate will slow GDP and may turn into habits which last for years if not decades.  A teenager whose parents get evicted will likely be permanently affected by the experience.

In your case I would recommend keeping financial statements and calculating ratios to track your financial vital signs.  For those that want to have an extremely solid financial condition I recommend (1) a positive net worth, (2) a current ratio greater than 10, (3) a debt-to-equity ratio below 10% and (4) net wealth in excess of 24 months.  Then you will be in better financial condition to weather The Great Credit Contraction.

My friends were always shocked by my “wealth.” They thought that my parents must be rich—they weren’t—and spoiling me. In truth, the only thing my parents ever did was allow me to do whatever I wanted with the money I earned or received, and as a result, I viewed the money as mine. My peers, by contrast, were typically forced to “save” a portion of any cash windfalls, and thus, the money was never even real to them. What money they did get and were allowed to spend, they blew immediately.

My good money habits stayed with me through the early part of my college years. I was into music, and there were two pieces of musical equipment I had my heart set on. Earning just above minimum wage in a ten-hour per week job, my arch-conservative parsimony allowed me to drop $2,500 in 1998 money—about $3,400 by today’s standards—on these objects of adoration after two years of diligent saving. Sadly, this was among the last of my penny-pinching triumphs.

Adult Realities Make it Hard to Save

What was responsible for my conversion from miser to spendthrift? Well, I’d like to blame it on credit card companies, and they are partly to blame, but mostly it was just the realities of adulthood. For when I was a youngster, my food and clothing and lodging were taken care of, leaving me to use my money for things I wanted rather than needed. But when I got out on my own, hoarding cash became impractical, what with the cable bill, the cell phone charges and whatnot. Saving was not an option because the interest rates paid by banks were, and are, laughable, and instead of delaying gratification as I had as a youngster, credit cards now gave me the ability to have what I wanted now and pay later—if ever.

America’s national prosperity was built on individual savings. But our national savings rate has now turned negative. It seems logical to suggest that children who save—or more accurately, children who decide (as opposed to being forced) to save—are more likely to become adults who save, but what of my story? I was a cheeseparing child but became a credit-cardaholic as a young adult. What went wrong with me?

So then, we have two questions to answer: 1) What can we, as parents, do to inspire our children to become savers, and 2) What can we, as a democratic nation, do to encourage saving by the adult populace? Let’s start with the first.

How to Encourage Your Kids to Be Savers

I grew up in an era where cash was king. The vast majority of purchases were paid for in cash because credit cards had not yet achieved critical mass, debit cards were unheard of and paying for everything with checks earned you cold glares from the people behind you in line. Thus, my parents—like most—had cash in the house. I saw it all the time’ and I knew what it symbolized. I wanted to have it!

Kids today, however, see a lot less of cash. Their parents use plastic to pay for goods and services, and they do, too—just think of all the iTunes downloads, World of Warcraft subscriptions, etc., that kids today purchase. So while I liked to hoard physical cash, there’s no such attraction for kids today. Physical money is so…totally eighties. It’s all about the electronic Benjamins, baby.

The above is my sociological observation and hypothesis. One thing that is more rightly treated as fact, however, is that kids’ perception of time is radically different from that of adults. When you’re eight years old, your living memory might stretch back four years. One year, then, is equivalent to 25% of your living memory. The idea of putting $100 in the bank so that he might earn $3.50 over the course of an entire year is not appealing to an eight-year-old, and thus, he’s extremely unlikely to willingly put money into a savings account. Forced savings undermine his legitimate ownership of the money and, thus, make him more likely to be a spendthrift with whatever money he gets that’s really his—i.e. the money that he can spend if he chooses to do so.

For kids, saving cold-hard cash is unappealing and outdated, earning miniscule annual interest rates over long periods of time is unattractive and being forced into saving is most damaging of all. So how can you encourage kids to save? The answer: bribe them.

Seriously: make saving line up better with their time preference. Instead of having them put their money in a bank that pays 3.5% annual interest, set up your own faux-accounts for them that pay 3.5% monthly interest—or more. Telling a kid that if he saves that $100 birthday present from grandma, he can have $110 in two months sounds a lot better than $103.50 in one year. The lessons you’re teaching them are to delay gratification and to give more careful thought to purchasing decisions.

The Culprit, As Always: The Fed

Now on to the bigger question: what can be done about American adults’ horrible savings behavior? The answer: only radical recomposition of our monetary system is likely to encourage savings. Fractional reserve banking and fiat money discourage saving since banks don’t need your money to lend—they can create it out of thin air. The Federal Reserve System keeps interest rates artificially low, which by definition encourages borrowing and discourages saving. The responsible thing for adults to do, of course, is stay out of debt and accumulate hard assets—such as gold—while maintaining a diversified portfolio of financial instruments designed to outperform inflation and generate a “real” return.

This, of course, is a lot trickier than simply hoarding money, as I did as a child, or buying bonds, like our grandparents did. Is it any wonder, then, that the divide between the rich, who can afford financial advice, and the poor, who cannot, has grown so wide? Teaching your children to be responsible with money is the most important thing you can do to ensure that they’re on the right side of the growing economic gulf.