2006 personal savings drop to 74-yr. low

[wabmester]

Well, my earned income is zero, my savings rate is waaaay negative, but my net worth is still increasing.

I'm sure there are other factors at play, but the recent increased liquidity of illiquid assets is definitely a big player in GDP growth.

Edit: I guess technically my savings rate is positive since we spend less than our interest/dividends, but it could be negative if we relied more on cap gains.

 

[cute fuzzy bunny]

Something doesn't add up.

Ever watch CNBC for many days in a row and realize that they use the same explanations on different days for completely opposite situations? Or completely different explanations for the same thing?

Its a BS stat and you can draw from it whatever you will.

Whats going to make people read magazines, newspapers and watch your tv show more..."Oh my god we're not saving enough money and we're all going to die in squalor!" or "Americans doing an adequate job of saving money"?

 

[2B]

Just for grins, here's the Neil Cavuto link on the report.

http://www.foxnews.com/story/0,2933,250018,00.html

 

[Nords]

Whew! That brush fire was put out again. I wager 8 weeks or less until another flare-up.

In the meantime, can you tell me if I should use the spare change I find on the sidewalk to pay off my mortgage or to pay the taxes on my Roth IRA conversion?

 

[Jarhead*]

Congratulations to the folks that have their own financial situations well enough in hand to have the time and inclination to participate in this thread.

That's actually a compliment. (Well, kind of).

 

[Gone4Good]

Whats going to make people read magazines, newspapers and watch your tv show more..."Oh my god we're not saving enough money and we're all going to die in squalor!" or "Americans doing an adequate job of saving money"?

That's true. I also think there is a vein of pessimism/anti-Americanism/anti-capitalism (call it what you will) that runs through a lot of this reporting. No matter how good things are the slant is always that some deep-seated structural flaw is going to upend the economy and all of this prosperity is, in reality, an illusion.

In today's NY Times Business section they ran an article suggesting that 4th quarter growth of 3.5% wasn't really all that good because nominal growth declined in the quarter. That is the first time I've heard a business publication argue that we'd be better off with higher inflation. Of course they didn't say it quite like that, but that is the essence of the nonsense they published. It's no wonder that most people think the economy stinks despite years of solid performance.

Fortunately, the pessimists are losing ground on which to fret (if anyone bothers to report it). Consider:

1) GDP is rebounding
2) Inflation is decelerating
3) Oil is way down from its peak (although running again this week)
4) US Exports are up 10% y-o-y
5) The dollar has stabilized
6) Real wages are growing at a healthy clip again
7) Unemployment of 4.6% is low
8 ) The CBO projected the federal budget will be back in surplus by 2012
9) Residential housing looks to be stabilizing
10) Corporate profit growth continues to beat expectations
11) Household wealth is at an all-time high

"But, but, but . . . the savings rate is low and the trade deficit is at a record high!!! WE'RE ALL DOOMED!!!"

 

[2B]

"But, but, but . . . the savings rate is low and the trade deficit is at a record high!!! WE'RE ALL DOOMED!!!"

It's a matter of perspective. Lesser numbers during the Clinton administration are reverently recalled as the "good times" by some of the press.

Before I get deluged with "Clinton was our greatest president ever" posts, I don't think that Bush II or Clinton did anything of note to impact the economic cycle their administrations experienced. Both of them inherited weak economies that just got better. So any political posts should include specific actions taken by the president that caused the economic shift.

 

[Gone4Good]

It's a matter of perspective. Lesser numbers during the Clinton administration are reverently recalled as the "good times" by some of the press.

Yes, I too recall the "Jobless Recovery" under Bush 41 followed by the "Clinton Expansion" beginning on inauguration day 1993 followed by the "Jobless" and "Wageless Recovery" under Bush 43. Likely followed by another "Clinton Expansion" under Clinton 44.

 

[wabmester]

Just for grins, here's the Neil Cavuto link on the report.

http://www.foxnews.com/story/0,2933,250018,00.html

If he's going to make stuff up, he should at least include one of the real reasons the savings rate is negative: we're getting older as a country, and retirees are increasingly represented in the stats.

 

[Cut-Throat]

It's a matter of perspective. Lesser numbers during the Clinton administration are reverently recalled as the "good times" by some of the press.

Before I get deluged with "Clinton was our greatest president ever" posts, I don't think that Bush II or Clinton did anything of note to impact the economic cycle their administrations experienced. Both of them inherited weak economies that just got better. So any political posts should include specific actions taken by the president that caused the economic shift.

Then please give Jimmy Carter credit for raising interest rates in the late 70's, that finally tamed inflation for any of the so-called successes of the Reagan years of the 80's

 

[wabmester]

Then please give Jimmy Carter credit for raising interest rates in the late 70's, that finally tamed inflation for any of the so-called successes of the Reagan years of the 80's

I think we all owe a debt of gratitude to Gerald Ford for his Whip Inflation Now campaign. I was only like 12 at the time, but I remember thinking "WTF!?!"

 

[2B]

Then please give Jimmy Carter credit for raising interest rates in the late 70's, that finally tamed inflation for any of the so-called successes of the Reagan years of the 80's

Carter didn't raise interest rates. It was the Federal Reserve and he had clashes with them over it. I also don't think it was necessary to the extent it was done. There were many ways to adjust to the rapid run up in oil prices and its fallout through the economy besides double digit discount rates. I don't recall how high the discount rate went but it obviously did no good until the economy collapsed in the early 80s. Then we had the S&L crisis.

Good ol' Jimmy. Wear a sweater and get used to being miserable. He's been one of our worst ex-presidents in history. He should have stuck with building houses.

 

[bssc]

Then please give Jimmy Carter credit for raising interest rates in the late 70's, that finally tamed inflation for any of the so-called successes of the Reagan years of the 80's

I think that I would agree with 2B and give Paul Volcker credit for raising the inflation rate and stopping inflation. I think that the high rates lost Jimmy the election in 1980.

 

[cute fuzzy bunny]

That whole protracted and extremely embarrassing iran hostage thing didnt help him much either.

Wow, from a discussion on personal savings rates to a pissing contest about democrats vs republicans in half a page!

Impressive!

 

[bssc]

I also seem to remember that with banks paying interest rates of 14% and the like, very few people increased their savings. My friend Tom got a T. Rowe Price money market account and was dumping every penny he could find into it. Sadly, I didn't but I learned by his example. If I could get 30 year Bills at 12%, I would be FIREd.

How is that for full circle?

 

[cute fuzzy bunny]

Even more sadly, cd's at 12-14% still didnt look like very good deals when every time you went to the supermarket your bill went up another five or ten bucks

Which proves the investing adage that you have to presume things will get better, buy things when nobody wants them, and sell things when everyone wants them.

 

[Gone4Good]

Then please give Jimmy Carter credit for raising interest rates in the late 70's, that finally tamed inflation for any of the so-called successes of the Reagan years of the 80's

The "so-called successes of the Reagan years" were a result of a policy mix - monetary, fiscal, and regulatory. Stagflation only happens when supply side shocks are coupled with easy money (i.e. the supply of goods and services decreases but demand is kept artificially high through low borrowing rates). The Fed can't increase the supply of goods and services. All they can do is try to move demand back in line with the reduced supply by tightening credit. Supply constraints need to be lifted through another avenue, or you just end up with both lower prices and GDP.

In the 80's Volker's interest rate increases (monetary tightening) were offset by a lowering of tax rates (fiscal stimulus). But more than just fiscal stimulus, top marginal rates of 70% were a disincentive to work and investment - representing a supply constraint. But even more than that, the tax code was dramatically simplified eliminating many loopholes which created perverse incentives and economic inefficiency. Furthermore, as one of his first acts as president Reagan lifted price controls allowing market forces to work by both helping to curb demand as well as inducing new supply into the market. Finally, deregulation also helped spur investment, which ultimately resulted in greater supply.

Certainly Volker played a part, but giving Mr. Carter credit for the success of the 80's and ignoring all of the fundamental policy changes that were enacted after he left office is a bit much.

 

[Nords]

Sadly, I didn't but I learned by his example. If I could get 30 year Bills at 12%, I would be FIREd.

At a Schwab client dinner in 2004 I sat next to a guy who'd backed the truck up to 30-year Treasuries in 1974-5. IIRC they were paying about 9%. He had been one very unhappy buy-and-hold investor the rest of the decade and into the early 80s. Sure, they had a guaranteed income stream, but they were worth a fraction of what he'd paid for them and the income stream was cut in half by less than a decade of inflation!

As he was approaching the age of 80 and the Treasuries approached maturity, he was looking for similar 9% investments and he compared his unhappiness to the way he'd felt in the 1970s. Looking back from three decades later he said he wished he'd been more in stocks. Of course the Schwab reps were drooling into their napkins...

 

[Cut-Throat]

I think that I would agree with 2B and give Paul Volcker credit for raising the inflation rate and stopping inflation. I think that the high rates lost Jimmy the election in 1980.

I think you all agree with me Paul Volcker was appointed by Jimmy Carter and was the Fed Chairman 2 full years before Reagan took office. Jimmmy Carter took the blame for giving the economy exactly what it needed at the time.

This nation's economy was not damaged under Carter, quite the opposite, but you keep hearing the tired old yarn for over 25 years.

 

[Slarty]

Has anybody reconciled this thread with the Harry Dent research (www.hsdent.com)? He does some interesting demographic research and correlations that show the impact of peak spending years. He's now doing this for different countries and not just the USA. There could be some implications for investment allocations.

Peak spending years tend to happen for people in their late 40's or early 50's depending on their income levels. Baby boomers are 45 to 60 years old with the largest number of them in the 45 to 50 year old range so its not a normal distribution. This plug of peak spending is moving through our economy and it makes sense that if such a large population is still in their peak spending years then we would see savings rates historically low.

Since we are people focused on living off our investments, I think its worth consideration how to handle the historic shift our economy is about to go through. HSDent correlations suggest the shift will hit around 2009 to 2011 and we could even see some nasty deflation, which has major implications for holding real estate and real assets that are leveraged. He sees this recession or depression lasting about 10 years until the echo baby boom starts spending heavily in the US. Other westernized nations don't have an echo baby boom and could be worse off. Also most emerging markets are heavily dependent on exports to westernized nations so they will be affected by this shift as well.

I think that predictions and correlations on long term trends like this are difficult to draw conclusions from that are useful in investment decisions, but I think it deserves an "eyes wide open" approach from us. If such a downturn comes to pass then it will happen at a rate that we should be able to adjust for with our invesment plans. Add in the "peak oil" scenario, or at least a reasonable belief that enerby is going to expensive in the US, like it is in Europe already.

So, how would we structure ourselves to survive such a scenario comfortably / optimally?

 

[HFWR]

Not to drift back on topic or anything, but my W-2 has a line for SS wages, which is total gross income, and another line that subtracts pre-tax items, like 401k and FSA deductions.

Ok, back to pissing on Carter Reagan Bush I Clinton Bush II...

 

[Gone4Good]

I think you all agree with me Paul Volcker was appointed by Jimmy Carter and was the Fed Chairman 2 full years before Reagan took office. Jimmmy Carter took the blame for giving the economy exactly what it needed at the time.

This nation's economy was not damaged under Carter, quite the opposite, but you keep hearing the tired old yarn for over 25 years.

According to Carl Biven's "Jimmy Carter’s Economy: Policy in an Age of Limits" "Volcker not only gave Carter little idea of his plans (with respect to interest rates) but also extracted from the president an explicit promise not to interfere in monetary policy."

So while Carter can be commended for a good choice as Fed chief, I'd hardly call monetary policy under Volker Carter's doing.

In fact, Carter's economic policy was decidedly Keynesian, which was the absolute wrong policy given the economic problems of the time. He pressured the Fed to "prime the pump" with easy money, applied fiscal stimulus to increase demand, and tried to manage prices administratively through price controls. Easy money exacerbated inflation, as did demand side stimulus. Price controls were a disaster that would have wrecked the economy for as long as they were in place. Anyone who has a basic grasp of economics understands that price controls exacerbate stagflation because artificially low prices spur demand (causing inflationary pressure) while they simultaneously reduce incentives to offer supply (causing lower output and greater inflationary pressure).

I'm sure Mr. Carter is a good man (although he seems like he might be losing his mind a bit lately) but he was not a good steward of the economy as president.

 

[Eagle43]

Well, Jimmy Carter campaigned on the misery index. Here's present day misery index, you know, GWB's economy, the one the Dems have been trying to tell us is so bad.

The US Misery Index
Misery Index (7.04) = Unemployment rate (4.5) + Inflation rate (2.54)

And here's a presidential list. Please note who's numero uno.

The US Misery Index by President:
http://www.miseryindex.us/indexbypresident.asp
1948 to 2006
Misery Index = Unemployment rate + Inflation rate

President Time Period Average Misery Index

Jimmy Carter 1977 - 1980 16.27
Gerald Ford 1974 - 1976 15.93
Ronald Reagan 1981 - 1988 12.19
George H.W. Bush 1989 - 1992 10.68
Richard Nixon 1969 - 1973 9.98
George W. Bush 2001 - 2006 7.96
Harry Truman 1948 - 1952 7.87
William J. Clinton 1993 - 2000 7.80
John F. Kennedy 1961 - 1962 7.27
Lyndon Johnson 1963 - 1968 6.78
Dwight Eisenhower 1953 - 1960 6.26
----------------------------------------------------

I'd hire Jimmy Carter to build my house. Nice guy, pathetic president, worst in my lifetime.

 

[cute fuzzy bunny]

This plug of peak spending is moving through our economy and it makes sense that if such a large population is still in their peak spending years then we would see savings rates historically low.

That assumes that this "plug" of people, aka the baby boomers, actually retires on the same schedule as their predecessors. While many argue that they will, others suggest they'll work an extra 5-10 years to wean themselves off the spending spree their lives have been. I suspect it'll be somewhere in the middle.

The very best action to take is none at all. Good asset allocation, emergency cash as appropriate, the right amount of cash and bond instruments earning a good rate over an intermediate period of time, and a flexible spending plan to ride out the worst of it.

Works in good times and in bad.

As far as the rest, I could care less about the economic arguments. I remember as a young man being incredibly angry and embarrassed that we'd let a bunch of pissants break international law, kill our marines, take our ambassadors and staff and hold them for a full year. With only one wimpy half assed attempt to rescue them.

And yeah, the executive branch has some sway over the fed chairman, but generally not much once appointed.

As far as the misery index goes, the unemployment rate is an incredibly deceptive stat. It doesnt include people who give up and stop looking for work, only the actively unemployed. It also throws in assumptions about jobs created on the basis of other economic figures that might or might not indicate that jobs are being created. I dont think its particularly useful for measuring anything, or even to measure changes in the job markets over time. Like the national savings rate, its a stat that measures something...but i'm not particularly sure what its good for.

The misery index would also perform well when faced with an administration that was increasing taxes and spending more on big government and government programs. More spending, more jobs, nicer "misery" numbers but not necessarily a better economy or better quality of life overall.

 

[bssc]

I'd hire Jimmy Carter to build my house. Nice guy, pathetic president, worst in my lifetime.

I think that Carter was the ultimate micromanager, which is not surprising giving his engineering background. This prevented him from seeing the big picture most of the time, although I will give him credit for holding Begin and Sadat hostage until they signed the Camp David Accords in 1978.

Reagan was much better at delegating and staying on message.