There is often talk in the financial papers about the “savings rate.” You’ll often see pundits making moral judgments about how Americans spend too much and save too little implying that the average American is a spendthrift, wasting resources, and living on borrowed time. On the flip side, there are those who say the economy is doing well and blast the idea that the low savings numbers matter at all. Both are wrong.

The rate at which people save and spend is self-adjusting in an unhampered market. This is because the ratio between this saving and spending is reflected in an interest rate that is received by savers and paid for by borrowers. The interest rate, like prices, is a means of communication. It tells savers and borrowers how other savers and borrowers are evaluating things. An interest rate tells a businessman when it is a good time to borrow. A low interest rate is tells him that it is a good time to expand production; people are saving for the future and there will be a future market for his products. A high interest rate tells a businessman the opposite. It tells him that people are spending now and its better to wait to expand production. The interest rate also sends messages to the consumers. A high interest rate tells them that savings are needed and attracts them to save, while a low interest rate indicates there is already plenty of savings available to expand production. All that information is hidden in an interest rate? Yes!

But, you might have noticed that all this talk about there not being enough in savings is following a time when the interest rate was very low. Doesn’t that suggest that there is a lot in savings?

Yes, it does. But there isn’t. Why?

This is because the market is not unhampered. In fact, the Federal Reserve garbles the interest rate message by “printing” money and putting it into “savings.” Obviously, you can’t really save by printing money. Money is just an intermediary that stands for something else. It stands for wealth, which isn’t money, but real things like food, refrigerators, microwaves, houses, cars, computers, phones, iPods, etc. By garbling the message, the Federal Reserve creates the appearance of wealth and prosperity, and plenty of savings for the future.

Economists sometimes point out that businessmen and consumers could eventually learn to ignore the faulty interest rate and act as if the interest rate is what it should be. This is not possible, no matter how adroit one might be at reading the signs. This is because the new money, the “savings” the Fed creates, is going to be spent by somebody and whoever spends it first benefits at the expense of those who spend it last. You can follow this reasoning for yourself. Just imagine a group of counterfeiters printing money in their basements. Would you object to their spending their newly created money if you could be certain that the new money would continue to circulate? Why? You would object because you know that the counterfeiters will get real goods without having to pay for them. Somewhere down the line there will be a shortage of goods everyone else. This isn’t changed because the new money continues to circulate; it is just hidden until the shortage of goods is revealed by higher prices.

American businessmen and consumers do not deserve the moral lashing they are getting for “spending too much” and “not saving enough.” They are doing exactly what they perceive to be in their best interests based upon the messages they are receiving. When the supply of money is expanding, it’s a very good time to be a borrower and a very bad time to be a saver.

This being said, it is absurd to think that the savings rate means nothing and that Americans can go on spending as they have been. The garbled message must eventually be corrected. This is the only thing that will make it worthwhile for individuals to save again and real savings are necessary for the production of real goods for the future. The Federal Reserve chairman, Ben Bernanke, knows this. That is why he must periodically “raise interest rates.” All Dr. Bernanke needs to do is stop the printing press and wait for the garbled interest rate message to right itself. You will recognize whenever the Federal Reserve is doing this by what economists commonly refer to as the “inverted yield curve.” Once the interest rate message has been revealed, the Federal Reserve can begin to slowly garble it again.

Why does the Federal Reserve print all that extra money and garble the interest rate message in the first place? They do it for the same reason counterfeiters print money in their basements.