Guest post by Jim Huller, president of Maximum Wealth Advisors

If you’re like a lot of people out there you have decreased your spending and accumulation of debt, while increasing the amount you have in savings.  A few years ago the national savings average dropped down to a negative percentage of income, meaning that the average person owed more than they had. Today out of necessity the average American has become more frugal, but it wasn’t that long ago that spending big was in vogue.

The mentality of “spend it if you got it”, led to those who didn’t to borrow it.  Now that the pendulum has swung back to thriftiness – the kind advocated by Green Candy.com – I turn today to the classic tale by Bastiat, with a modern twist, for the wisdom of saving.

Picture two friends, one a spendthrift (Purchasing Fanatic Pete) and the other a prudent man (Coupon Clipping Chip), each of whom will have an annual income of $50,000.  Pete has won the lottery, while Chip has inherited his money.

Pete is a big spender, and like Plies, he wants you to know it.  He believes if you don’t spend ALL of your money, you will add to unemployment.  Who knew spending could be so fun and patriotic at the same time?  Purchasing Fanatic Pete loves to go to all the clubs, where he can make it rain.  Of course, he has “his people” with him, and showers them with the latest gadgets from Circuit City and Sharper Image; he gives expensive gifts to his friends to “show some love” or “spread the wealth”.

To live large, Purchasing Fanatic Pete has to dip into his capital. But so what? If saving is a sin, dissaving must be a virtue; and in any case he is simply making up for the damage being done by the saving of his tightwad friend Coupon Clipping Chip.

Everyone knows and loves Pete.  Coupon Clipping Chip though, isn’t so well known. He rents videos from Netflix and drives a Toyota.  Whereas Pete spends all of his $50,000 (and then some), Chip lives modestly and only spends half of his $50,000, and banks the rest.  Since most people only see what’s in plain view, they assume Chip is adding less than half as much to employment as Pete and the other $25,000 is as useless as if it wasn’t there.

Of Chip’s $25,000 leftovers, his short-term savings goes into the bank, allowing the bank to lend it to businesses on short term for working capital.  With his long-term savings Chip invests his money in stocks, bonds, or real estate.  When Chip’s money is invested (directly or indirectly) it is used to buy or build capital goods—houses or office buildings or factories or ships or trucks or machines.  All of these projects puts as much money into circulation, and adds to employment, as much as Pete’s spending sprees do.

“Saving,” is another form of spending. The difference here is that the money is turned over to a corporation to spend on means to increase production, which is what leads to lasting employment. But most people don’t see this activity directly, and only notice the big tips our friend Pete hands out.

A dozen years roll by and Purchasing Fanatic Pete is bankrupt.  He returns his Hummer to GM (who also did a poor job of handling its business), but is unable to return his worthless trinkets to the stores he used to patronize – they’re gone now.  Pete muddles through town, saying “I used to be somebody”; he is viewed as a failure.  He turns to begging from Chip, and GM goes begging from the government.

Meanwhile Chip has continued his spending and savings regiment, and is not only providing more jobs than ever, (because of his income through investment has grown), but his investments have helped to provide better-paying and more productive jobs. His capital wealth and income are greater because of it.

Coupon Clipping Chip has added to the nation’s productive capacity and Purchasing Fanatic Pete has not.  Therein lies the problem with our current state of affairs: we’ve had too many Petes and not enough Chips.  Now that the party is over, what we need is a return to sensible economic policies – we need to encourage productivity and savings.  We also need to teach the next generation.