"...a recipe for national disaster...

Tuesday, February 07, 2006
...far beyond the scope of anything President Bush chose to address in his speech..."

The threat to end all threats - the negative national savings rate.

The Sketical Optimist (I've advised you before to check in regularly) has a post up questioning whether Americans really are the wanton spendthrifts we are made out to be.

He points out the seemingly odd fact that, though the savings rate was less than zero last year (negative 0.5% according to the Bureau of Economic Analysis), American households boosted their net worth by almost 11% - from $46 trillion to $51 trillion (according to the Federal Reserve).

And no, that wasn't just because homes got more valuable - the increase in the value of real estate accounted for $2.3 trillion of the $5.0 trilllion gain, while the value of financial assets increased by $3.4 trillion (liabilities rose as well, by about $1 trillion - also about 11%). The increase in the value of financial assets includes balances in checking accounts and cash (+ $23 billion), time deposits and savings accounts (+ $420 billion), municipal bonds (+ $80 billion), and, of course, directly held equities (+ $180 billion) and mututal funds (+ $650 billion).

The negative savings rate puzzled me, because it always seems that people as a whole act more rationally (at least from an economic perspective) than I expect, not less. A low savings rate I could believe; a zero, or negative, rate makes it sound like we long ago shuffled collectively off to the looney bin.

It turns out that the savings rate is an odd construct; it counts all taxes as reductions to income (including capital gains taxes on, for example, the sale of stocks), but doesn't count all income as income (such as the capital gains themselves). And if you are retired and spending down your portfolio, or recently sold your home and moved somewhere less expensive, you are spending money you never earned.

Let's say you sell me your home for $200,000, having diligently paid down the $80,000 you borrowed in 1990 when the price of the home was $100,000. You pay off the remaining $50,000, and have $150,000 to spend. Not income, though, according to the savings rate, and, because the savings rate is calculated by subtracting spending from income, it can't be part of savings - even if you put it all in the bank and move back in with Ma and Pa (hey, why not? Were a nation of slackers, too).

But the commissions - spent. Closing costs - spent. And the outstanding principal on mortages rose by $110,000. You've come into a nice chunk of change. I've done the smart thing and bought while mortgage rates are low. But geez...

What a bunch of spendthrifts.

Though, honestly, it seems to me we're more accurately described as capitalists - owners of assets that produce a return. And that maybe the fact that we own more return-producing assets than ever before accounts for the ever-declining savings rate. And that that's not actually a bad thing after all.

Let's crunch some numbers, shall we? If net worth continues to increase by 11%/year while inflation runs 3% and population grows by 2% per year (for a 5.65% annual real rate of increase of net worth per capita), a child born this year will retire at 65 in a country with a net worth per capita of over $6,000,000 in 2006 dollars (up from $170,000 today).



Knucklehead said...


That was fun! Thank you.

Seneca the Younger said...

The one that always puzzles me is that we don't include the 15 percent going in to the Federal Insurance "Contributions."

Buddy Larsen said...

Yup--we're fixing to hear the Democrats play like there is no such thing as a balance sheet, and that (and I heard this during the Kerry cmpgn, speaking of the absolutely normal 3.2% of GDP deficit) "Percentages don't mean nothin', the numbers is the numbers!"

And the party of never-ending increases in the rate of entitlement-spending growth, wax righteous on "putting our grandchildren in debt".

Destructive demagogues creating economic illiteracy, dumbing-down as fast and hard as they can, the people who look to them for leadership.

Morgan said...


Thanks. Had fun writing it.


Hmmm. You're right. Either we count that as savings borrowed from us by the government, or we count it as taxes and we have to downgrade the national debt from $8.2 trillion to $3.4 trillion. Gotta be one or the other. Can't double un-count it.

Morgan said...


Just keep doing whatever it was we did last year, and our grandkids will be able to pay off that debt without blinking an eye.

MeaninglessHotAir said...

Thanks for the optimism.

maybe the fact that we own more return-producing assets than ever before accounts for the ever-declining savings rate

It is highly desirable to quantify that.

David Thomson said...

Americans are increasingly becoming overall wealthier. The actual size of their savings is of secondary importance. Furthermore, it is usually foolish to place a lot of one’s money in a low return savings account. Are you possibly a home owner with a modest debt load? If so, you can get a loan almost immediately. This is all that really matters in an emergency.

terrye said...

People do have more assets, but they don't save money like the old folks who feared utter ruin any and every day.

I had a real estate license, [if I go do the continuing ed I still do in fact] and I can not tell you how many times I had people who did not even have earnest money looking for a home. Cash was something they had never heard of.

I would point out to them that if a thousand bucks earnest money was hard to come up with maybe they should rethink the 3 bedroom 2 bath ranch with a 3 car garage on 5 acres...and they looked at me as if I had smacked them upside the head.

My broker told me to concentrate on one thing only: the monthly payment. No amortization schedule. Under no circmustances were they to be reminded what that house could actually end up costing them.

Americans today do not know poverty like my grandparents did when they left Oklahoma in the Dust Bowl to go to CA and pick peaches...but to the same extent many of them do not know how to live within their means either.

For some folks a decent rental and some T bonds might be a better way to go than a $1600 mortgage payment and a $600 a month truck payment.

Morgan said...


I think you are absolutely correct. People rely more heavily on asset appreciation (rather than savings) to fund future expenses - primarily homes and equities, I would guess.

People who went through the Great Depression/Dust Bowl period learned that assets don't always appreciate. Some never even regained their trust for banks. They became extremely risk averse in choosing ways to hold value - cash in the mattress savers.

People today take it for granted that assets will continue to appreciate. It's a great strategy if you're right - buy the biggest home you can possibly afford with the smallest down payment you can make and leverage the mortgage to produce a 10% annual return. Woohoo! Make money with the bank's money, as long as you make the payments. Too risky for me, though.


I'll pull some numbers together to quantify the increase in assets owned (in real dollars, adjusted as best I can to account for fluctuations in the nominal value relative to the real value - i.e. I'll try to keep bubbles from impacting the data).

The Census Bureau has data going back at least to the mid '80s.

Rick Ballard said...

"Too risky for me, though."

The way you describe it's too risky for anyone but the slowest among us.

There are a number of ways to minimize the risk and make real estate a very viable investment that will provide returns above what the stock market is able to provide but they are not suitable for those unable to discriminate between need, want, and desire - the folks Terrye describes.

0% down and interest only mortgages provide an excellent vehicle for an intelligent couple to purchase the smallest house on the best street and wind up paying no more than they would in rent. The kicker is that they need to be able to afford the 30 year amortization payment on day one. Otherwise they're going to lose sleep. They also need to know what the historical market appreciation rate is for their market. There are markets with appreciation rates that approach 0.

Wrt your main point, I wonder when the statisticians will change from a static analysis model to a model reflecting reality? There truly is a political rationale behind the methodology used - and it ain't free market capitalism.

Morgan said...


It was an extreme example - I'm convinced that some people have adopted that strategy. There is no doubt that some people do a lousy job assessing risks.

But your main point is consistent with the intent of my post, which is that people have become more investment savvy, and are seeking higher returns on their investments. They're also getting higher returns (while the low returns are going to purchasers of government debt), allowing them to spend more than they "earn" in wages and still come out ahead.

I think there is some feeling out there that a zero savings rate is a hard floor, and that we must finally have reached asymptote.

But I don't think it's so - savings rates have been in decline for a long time, and if that really is because the return on assets has increased, they may continue to drop well below zero.

Buddy Larsen said...

Steve Forbes said on CNBC the other day that every dollar of Reagan Deficit (the big boo-boo thing) created $10 of national wealth.

Again, the 'balance sheet' is a totally different measure than cash-flow. The skew-factor for a balance-sheet appraisal of national economic performance is liquidity--your assets can't be turned if there's no buyers.

So, balance sheets can change in a hurry--that's where the stock markets, acting as the daily discounter, come in as a thermometer. and currency, too, of course. US$ is downtrending but only a little, and spottily, as flight-to-quality battles the trade-deficit & liquidity-perceptions, and only after a huge five year run-up.

Valuing the (broad-base) SP500 by the rule-of-thumb "earnings discounted by interest rates", the SP500 is about 30% undervalued currently.

Question is *why?*, and the answers are manifold--war, memory of the dot-com bubble, fear of housing bubble, price-of-gold/fear-of-inflation.

Bulls say that all one need do is to keep an eye on the long-bond rate, and it's value and rate/direction of change is all the info one needs to evaluate national macro eco performance.

Bears say that the long rate is skewed 'too-low' by higher-than-usual flight-to-quality demand originating in the 40% of auction sales bought by foreigners private & gov't.

But a rate is a rate. The Fed is trying to slowly drain liquidity (against its inflation fear & reality), but all they've done to the long rate (which is controlled not by Fed but by the mkts) so far is to invert it--a classic recessionary signal, historically (all inverts are not followed by recession, but all recessions begin with inverts).

Yuan-denominated 30 yr US bonds just 2-3 days ago broke an uptrend line, and with the so-called 'tips spread' are both signalling *at-least* moderately higher inflation ahead.

But again, global productivity gains are just as diligently *lowering* prices, and may continue to prevent that inflation from digging in.

What a swirl. Personally, I got some nasty finger-burns over the last few days in oils and gold and am kicking myself for not playing 'black-box' and bailing at First Sign of Trouble. But, I've weathered so many false-bubble signals, better to wait and watch.

Currently, a counter-trend in tech is building--Cisco at last is moving--so, if one stays balanced on both feet, and disciplines against playing in the froth (alas I never learn--but do keep the 'play' lite), I'm betting with the bulls, that we can count on the global economy to continue growing nicely near-to medium term.

Long trends are always good on the demand side, people want stuff, value-adding global trade has already greatly lifted the planet. Supply-side long-trend is good for everything except energy--as currently supplied & demanded. But even so, energy is but a few percent of manufacturing's cost-of-doing biz. Hugely important at the margin, where confidence, price, and profit (profit in the sense of creating future business) converge, tho.

Jeez, I forgot what my point was when I started typing, Oh well. I think it was just "Hooray for America!"

Buddy Larsen said...

However, if Newmont Mining and Schlumberger don't gimme my money back after this two day haircut, I'm gonna have to throw in with Castro.

Rick Ballard said...

Serves ya right for buying French.

Buddy Larsen said...

But they're our allies again now, sorta, i think, maybe, perhaps, all things considered. I think I'm gonna dump the stock position and drop the smoldering remains in on some of their late-summer call options, @ somewhere just in or out of-the-money. Lose the whole play, or win it even bigger. Either way, the oils and gold turning down gotta be good for us all, even when you get burned a bit rolling dem dice wit de debbil. read this, just up on MSN (bolding mine):

"Greenspan talks to Lehman Brothers, bonds slip:

He may no longer be Federal Reserve chairman, but he can still spook the markets.

Stocks looked set for solid gains after the government reported an encouraging spike in gas inventories. But then a rumor swept through the bond market about what Alan Greenspan may or may not have told Lehman Bros. last night about the economy. Bonds sold off, wiping out a rally on the 10-year Treasury note, which fell to unchanged. In turn, the major equity indexes came off their highs.

Greenspan met last night to meet with senior Lehman executives, CNBC confirmed. It's not known exactly he said, but bond yields moved higher. The 10-year Treasury note was yielding 4.6% today, up from 4.57% yesterday. That's an indication that the former chairman was bullish enough on the economy that the audience concluded more interest rate hikes will be needed from the Fed.

There could be nothing to Greenspan's comments, but the market's reaction is a clear sign how thirsty Wall Street is for some economic news and how unsure investors are about what new Fed Chairman Ben Bernanke is planning."

Buddy Larsen said...

I guess you have to be a graybeard to marvel at that far-below 5% long-rate, even in the face of all the easy Greenspan money sloshing around the globe. The tax-cuts have been a wonderful signal to the world that the adults are back in charge. Alas, it won't be permanent until the grownups get around to taking back the Democratic party.

Buddy Larsen said...

The 10 yr auction today signalled strongly that tomorrow's 30 yr auction--the first 'new' 30 yr paper--will see very strong demand. Strong demand = low rates (including the--linked--mortgage rates).

The economy has ignored so much dire--and wrong--forecasting lately that as people were saying here (on another thread), that the left's racialist jawbone is shrinking, so too is the left's chicken-little act with Bushonomics.