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For a long time, the way to climb the financial ladder was to accumulate wealth incrementally through diligence and thrift. People scrimped, saved, laid a financial foundation, and built their fortune over time. They left their heirs with assets to continue the process.

In the past half-century, the incremental, multi-generational method of wealth-building has been supplanted by a leveraged approach. Calculated borrowing (for a better education, for a home in an up-scale neighborhood, for a business opportunity, etc.) made it possible to acquire things today, pay for them tomorrow, and end up with substantial accumulated wealth as well (because the home appreciated in value, the college education brought a lifetime of higher income, and the business was sold to someone else).

The leveraged approach makes it easier for more people to have more of the “good life” sooner, as long two conditions are present: first, borrowers faithfully make monthly payments for their mortgage, auto loans, and credit cards; second, the underlying assets continue to appreciate.

Many Americans and many American businesses, have taken the leveraged approach. Some borrowed because they had no other options. Others reasoned that rising income and future profitability would let them use credit as a financial shortcut. Today, they find themselves with limited savings, too much debt, and only one way to keep afloat: by deferring payments until a later date. The President is correct in stating that many Americans are dependent on lenders for their economic survival.

But a revived credit economy will happen only if lenders believe their loans will be repaid.

And there is the rub.

Right now, lenders don’t think the average American, or his/her business, is a good risk. The economy is in the tank, real estate values have plummeted, unemployment is up. Legislators can regulate lending practices and give institutions more money, but they can’t force lenders to make risky loans.

Right now, lenders have a particular aversion to borrowers without assets. For those with assets (positive cash flow, savings, equity, etc.) credit is available, often on better terms than before the recession. But for those without assets, credit is either expensive or unavailable.

This separation of credit haves and have-nots based on accumulated assets was highlighted in the headline article from the August 29-30, 2009 Wall Street Journal, titled “Halting Recovery Divides America in Two.” On one end, the CEO of a national restaurant chain with $100 million in cash and no debt says;

“For us, this is the best of times. Cash is king and this is a buyer’s market.”

At the other end a high-tech irrigation company can’t get financing to fill large orders because

“these are the bumps in the road that are driven by being cash-poor.”

At some point, individuals have to come to grips with these realities. Notwithstanding the big-picture perspectives of economists and policy-makers, the only intelligent response to the contraction of credit is to accumulate assets – to save. Otherwise, you run the risk of becoming a lifelong debt slave, with no guarantees that more credit will be available in the future. In the long run, credit-dependent individuals and businesses will be left behind.

Chris Isidore may think that a groundswell of saving and debt reduction will “only make matters worse.”  There are those who beg to differ. Steven Horwitz, an economics professor at St. Lawrence offers the following rebuttal in the September 2009 issue of The Freeman:

Most saving takes the form of financial instruments, including everything from basic checking accounts to the fanciest investment tools. If people are keeping higher checking account balances or putting more in savings accounts or money market balances, that wealth is not withdrawn from the economy. It is simply channelled elsewhere than into consumer goods.

An increase in the savings rate represents a change in consumers’ time preferences: They are saying; they are less interested in current consumption and more interested in future consumption… Restricting consumption does not
hamper economic growth. In the long run, economic growth requires savings and the creation of new capital goods.

Credit-fueled economies usually overheat, then flame out after many people have been burned. And the boom-bust cycle of credit always punishes greed and impatience.

The key action for financial recovery is saving. Even in this recession, there are still financial instruments that can serve as safe and productive repositories for your dollars. Find these instruments, and use them.

There are still legitimate, wealth-building reasons to borrow, but borrowers strike the best credit agreements when they can bring assets to the table. Even better, savers may eventually become lenders. If borrowers are debt slaves, then lenders are the masters.

Plato is right: to refuse to master your finances puts you at risk of being mastered by others – and not liking it. Saving is the essential action that makes it possible for you to control your financial destiny.

• WHERE DO YOU STAND ON THE DEBT DIVIDE? ARE YOU A BORROWER WITHOUT ASSETS?
• WHO CONTROLS YOUR FINANCIAL DESTINY?
• THERE ARE STILL GOOD PLACES TO SAVE!