Saving Rate is now Negative

[robert]

Per recent CNN article:

Personal incomes increased 0.3% in July, while spending soared ahead by 1%. As a result, the personal savings rate tumbled to negative 0.6%, the lowest since monthly records began in 1959. Read the full report.

Quarterly data show negative savings rates for several quarters during the Great Depression. The savings rate was negative 0.2% in October 2001 and was 0% in June.

Negative savings rates are possible if consumers spend by selling assets, dipping into savings or borrowing against future income.

See rest of article at:

http://tinyurl.com/d6c2p
How long can we keep this up?

Edit to reduce size of URL

 

[TargaDave]

Does anyone know the "savings rate" formula that is used in these reports? Not trying to defend anything here just trying to understand how they come up with this number. I read in a WSJ ariticle that it didn't include investment gains, property gains, etc. How would they even measure it?

T-Dave

 

[moghopper]

Does anyone know the "savings rate" formula that is used in these reports? Not trying to defend anything here just trying to understand how they come up with this number. I read in a WSJ ariticle that it didn't include investment gains, property gains, etc. How would they even measure it?

I have no doubt that as a nation we don't save much, but I think this number is total garbage. But hey, on the other hand, it comes from your government, and they're here to help, right?

The Bureau of Economic Analysis starts with personal income, which includes wages (from a job or self-employment), dividends, interest, rental income (if you are a landlord), and employer contributions to health and retirement plans.

From this it subtracts income tax and the employee's share of payroll taxes. The difference is disposable personal income.

From this it subtracts consumer non-investment expenditures, including retail sales, utilities, interest payments on consumer debt, and money people send to friends and relatives overseas.

For housing, the bureau counts rent for renters or mortgage interest, property taxes and insurance for owners. It does not subtract down payments or principal payments on a house.

What's left is personal savings.

 

[Michael]

I read in a WSJ article that it didn't include investment gains, property gains, etc.

That's correct. You can't build a new factory with the price rise on homes, only with the difference between what people produce and what they consume. That's why they only measure that difference.

How long can we keep this up?

Because so many other countries are great savers, there is a world wide surplus of savings. No more is really needed at this time.

 

[P.S.]

Because so many other countries are great savers, there is a world wide surplus of savings.  No more is really needed at this time.

This isn't so explicable to me. Could you lay out your reasoning? My retirement fund or rainy day kitty has no immediate bearing on my neighbor. Microsoft's investment in it's people and company has no immediate effect on Caterpillar. ..

 

[Michael]

Microsoft's investment in it's people and company has no immediate effect on Caterpillar. ..

Cat uses computers that have Microsoft Windows installed. Microsoft hires construction companies that use Cat tractors to prepare the ground for a new Microsoft office.

Both Micro and Cat borrow money in the international market to finance their activities. If your 401k has a bond fund in it, you have loaned money to both Micro and Cat so they could expand their operations.

However, my main point was that there is so much excess savings on the world market that both Micro and Cat have no trouble borrowing money to expand their operations.

 

[Craig]

I've been told the savings calculations don't include qualified plans, such as 401(k)'s ... I agree the data is questionable.

But whatever the exact numbers, it is shocking how many people do not save, or do not save enough.

 

[Michael]

As I understand it, the data only includes employee contributions to 401k plans. It doesn't include employer contributions.

 

[BunsGettingFirm]

The savings rate does not include 401(k) contributions, IRA contributions, the extra payment you make toward your mortgage, or the stocks and bonds you buy outside of retirement plans. Basically, anything other than traditional savings in a bank account or in cash is not counted. Yeah, it is very misleading.

 

[Donner]

Check out this week's Barron's. Article entitled "The Big Hook" by Sandra Ward. It's an interview with two hedge fund managers who view the negative savings rate as very alarming. They maintain that "Consumers are broke but they don't know it yet."
They maintain that consumers are using their credit cards to make their debt paqyments. They maintain this situation is unsustainable and further, only sustainable fora couple of months! They also have a very interesting take on the level of mortgage debt in the nation. They maintain that real estate has become an investment class and should be treated like any other investment class. They maintain that it costs about 8% to maintain a piece of real estate -- mortgage, insurance, taxes etc. and that at this point if real estate is not appreciating more than 8% per year it is a losing proposition as an investment. They think that RE is about tapped out and we are facing a problem there. Real good read.

Donner

 

[BunsGettingFirm]

Donner, hedge fund managers are always spewing doom and gloom. Our doom and gloom make them rich and famous!

 

[TromboneAl]

Although the number is probably bogus, I do get the impression that many or most americans are indeed broke but don't know it yet.

But what are the consequences of this? How will it affect the markets? If tomorrow they stop spending and start saving, what happens?

 

[Marshac]

Although the number is probably bogus, I do get the impression that many or most americans are indeed broke but don't know it yet.

But what are the consequences of this?  How will it affect the markets?  If tomorrow they stop spending and start saving, what happens?

Consumption drops, profits fall and become losses for some. Jobs are lost.

 

[moghopper]

Consumption drops, profits fall and become losses for some. Jobs are lost.

Yea, but more repo (wo)men will be needed. So that's a future growth industry.

 

[Donner]

This negative savings story hit the Washington Times editorial page today.   The guys in Barron's pointed out that Real Estate leverage is a two edged sword.  Works great to spur consumption when
RE is on a rocket ride and folks are pulling equity out to buy their toys.  But, they warn, its going to cut hard the other way when RE stalls, or even drops in some areas.  The Barron's guys maintain that people will figure out fast, fast that they are broke.  Then will begin the process of DE-LEVERAGING.   This is a term that all of us are going to be hearing more and more in the future.  Greenspan alluded to it in his Jackson Hole speech. 

The Barron's guys say that the benefit to GDP from leverage derived consumption is already baked into the cake.  With mortgage related debt skyrocketing (61% of all bank credit outstanding and growing) all that is left is paying off that debt.  Just how is all that mortgage and HELOC debt going to be paid off if RE stops appreciating 20% or more annually?  Folks are going to start to DE-LEVERAGE reduce the debt outstanding either voluntarily by liquidating assets or be compelled to de-leverage over time by reducing consumption and directing more disposable income to debt liquidation -- a kind of forced savings.  Either way it is going to cut hard into the economy (enough to drive us into recession according to the Barron's boys) and by extension drive hard into the markets as well.

In a different article in the same Barron's a group of paid Wall Street flacks predict that the S&P is going to end the year comfortably higher -- (complete with smiley portraits! )  Why?  According to the most optimistic Bull in the round -table: there needs to be multiple expansion for the market to move higher from here -- the public has to be sucked in in the last quarter like it has been the last couple of years-- that will happen when investors turn to stocks when they bail out of RE!   Boy, has that guy got another thought coming.

Finally, Barron's indulged itself in a "Who Can Afford to Retire?" editorial.   Nobody, of course.  Haven't been saving enough.  Don't think they hang around this Board.

De-leveraging.  Interesting thesis.

Donner

 

[Marshac]

I really don't believe that leverage is the correct word to describe most consumers' situation. The word I would use is just plain debt. Companies and investors use leverage (OPM) to secure assets in order to increase their own rate of return.

Most consumers take on debt in order to buy the new 47" plasma display at Best Buy, or that new Hummer H3.... neither of which are investments, and both of which are depreciating assets. If you asked most home owners these days about their house, and why they bought it, the phrase 'it's a great investment' will inevitably come up. Do they know why it's a great investment? Have they played with the rent/buy numbers? No, they just repeat what they have heard in order to justify to themselves the exorbitant amount of debt (not leverage) they have taken on. This type of debt is a drain on the future economy as it is simply consumption today at the expense of tomorrow.

 

[BunsGettingFirm]

My townhouse's mortage is the same as the rent on a one-bedroom apartment, and that's a 15-year (now more like 8- or 9-year) mortgage. OK, I have to pay real estate taxes, but then again, I don't have to hear my downstairs apartment neighbors "celebrate" Valentine's Day at 3:50 AM!

Cash out your house to buy a Hummer H3? Why would any sane person do that? I'd rather go to graduate school full time to get my second master's degree. Hmm...that last comment just made me realize that perhaps I'm the insane one.

Buns

 

[Nords]

However, my main point was that there is so much excess savings on the world market that both Micro and Cat have no trouble borrowing money to expand their operations.

No matter how fast they're saving, I bet the U.S. Treasury can print the dollar bills even faster...

We can't even decide what the actual CPI is or how many jobs have been created from one month to the next. What makes us think the govt has a clue what people are saving? I think it's great that the savings rate is negative, because if the govt thought it was positive then it'd be subject to taxation.

 

[sgeeeee]

. . .I think it's great that the savings rate is negative, because if the govt thought it was positive then it'd be subject to taxation.

But can't you just imagine some politician thinking, "There are a small number of savers who have saved a lot. There is a large number of non-savers who want a lot. . . If we tax the savers and give to the non-savers we gain the maximum number of votes."

 

[Michael]

If we tax the savers and give to the non-savers we gain the maximum number of votes."

Actually they do, its called inflation.

No matter how fast they're saving, I bet the U.S. Treasury can print the dollar bills even faster...

That's true. The fed prints money, loans it to banks, who then loan it to individuals and companies. This causes inflation, which is a hidden tax on savings accounts. This supplements savings by foreigners. The resultant low interest rates guarantee that savers will lose ground to inflation, to the benefit of borrowers (who are the majority).

So far equity has kept ahead of inflation, but dividend rates are getting quite low as ever more savers switch to stocks to avoid certificates of confiscation at banks. Some wonder how low the dividend rate can go, and still have equities provide a decent return. Take your best guess.

 

[uncledrz]

Donner
The last few posts have given an answer to the de-leverage possibility. It does seem that our government, which controls the money supply, is more willing to inflate than to have a prolonged recession which effects employment. Thus, while some will get stung when asset prices go down (or at least don't go up), those will only be the most leveraged/speculative positions.
I see a downturn, but not doom.
Uncledrz

 

[Donner]

Donner
The last few posts have given an answer to the de-leverage possibility.  It does seem that our government, which controls the money supply, is more willing to inflate than to have a prolonged recession which effects employment.  Thus, while some will get stung when asset prices go down (or at least don't go up), those will only be the most leveraged/speculative positions.
I see a downturn, but not doom.
Uncledrz

Uncledrz--

    I agree-- lots of interesting observations on the de-leveraging idea on this Board.  As usual I think we all see a little part of this thing.  Tough to get your mind entirely around the whole thing.   

One misconception that is oft repeated is that the Government prints money and causes inflation.  Not true.  In our system money is created by banks through lending to business and consumers.  The Fed indirectly controls how much lending can occur and what the money supply is ultimately going to be.  The Fed views its prime function in life (by its very Charter) to be to maintain an acceptable tradeoff between unemployment and inflation.  Remember, they are bankers first and foremost and they want to get repaid the dolllars they loan with dollars of equal purchasing power at some time in the future.  Bankers HATE inflation.  Fed policy is first, last and always is to protect the bankers against inflation.   Take a look at a dollar bill in your wallet.  It doesn't say U.S. Government Note on it.  It says Federal Reserve Note.   You got a problem with that note take it up with the Fed, not your U.S. Government.

Side note:  JFK was not happy with the money creating power of the Fed and he was about to introduce legislation
to take that function back from the Fed and return it to your U.S. Government.  Some people think that is the real reason behind his assassination.  (not me)


If you ask me the bankers at the Fed are more interested in getting a dollar back for a dollar lent in one year or two years or ten years then they are about how many people have to be unemployed to make that happen. McCulley at PIMCO often cites the "army of the unemployed" which is the real guarantor of "price stability" which is the holy grail of Fed policy.  All the talk about Keyensian management of the economy ( which focused on the Government borrowing money to create public works to stimulate demand and boost consumption thereby pulling you out of a depression) vs Supply Side management of the economy ( cut taxes to stimulate investment to increase supply to balance supply and demand and thus kill inflation) is interesting, classical, academic and in my opinion inadequate to explain or deal with the situation the world now finds itself in.  We are in new territory where the old relationships the old (and current) theories about how to manage an economy and the old tools to deal with emeging problems are inadequate to the task ahead.  Greenspan said as much at Jackson Hole.  They see a financial Tsunami headed our way and are preparing the old tools to deal the best they can with the consequences.  They feel that they still have the ability to pick up the pieces of a big blow-off in the markets and/or the economy.  Maybe so.  But they can't and aren't working toward heading off that kind of outcome.  Somebody's going to get hurt.

Greenspan sees big problems in speculative asset valuations everywhere.  He doesn't really care except to the extent that it threatens the "real economy" ie.,  that great mythical "neutral level" of interest rates, inflation (price stability)and unemployment.  Read him carefully.  He is rooting for "prices" and "interest rates" and slowly escalating "risk premiums" to "adjust" gradually over time ("adjust "means prices for financial assets go down -- a long way) in a way that does not threaten his precious balance between inflation and unemployment.  He WANTS to see a de-leveraging market only slowly, over time.  A slow motion killing of your financial portfolio.  If a bunch of savers and investors, foreign and domestic, die a slow, seemingly painless death without manifesting effects on unemployment and inflation the Chairman will get down on his knees and say his prayers of gratitued to the Almighty. 

Of course, if you have been following any of my posts on this you will see that I don't think the Chairman gets this nice quiet kind of death for the markets.  I think he is going to get a big bang explosion of risk premiums and a heart stopping overnight plunge in asset values a la 1987, only worse, at some point in the future.  And I blame CNN and instant communications for that.  We will all freak at the same instant.

So, the problem we are facing is not the Government printing money.  The U.S. Government ain't the problem here.
The problem is inadequate worldwide demand for the goods produced by factories in every jungle in every third world nation on the planet.  Inadequate demand, coupled with a ferociously imbalanced pattern of savings around the world.  You throw into this inherently unbalanced situation Americans seemingly unquenchable thirst for expensive junk financed by borrowing and you got yourself a big stinky problem that is frought with all kinds of geo-political risks.  Add on top of that a Fed that appears incapable of acting proactively and is telling you outright that its plan is to pick up the pieces, well, then maybe you can see the basis of my intermediate term gloom 'n doom.

The negative savings rate is significant and alarming.  Just think of it as applying to any household.  How long can it last?  Don't know.  For some families it could last a long time as debts mount, slowly at first, but at an increasing rate.  Maybe with both spouses working you can keep it up for a while.  But then something happens.  Somebody loses his/her job or gets sick.  For the economy as a whole, that would be my geo-political event.  Volker calls it
"some event, or combination of events".  And then you got a problem.  For the householders, when the credit card companies and the creditors get wind of it, you have rapidly expanding risk premiums as they jack your interest rates up to 22%.  Same thing is going to happen to the good old U.S. of A. as a whole if our worldwide creditors think they are getting a whiff of a problem.  We will all freak at the same time and, I believe, we will witness an overnight, CNN induced, megaton explosion of risk premiums.  Can't pin this on the U.S. Government.  When's it going to happen?  Don't know.


Donner

 

[Marshac]

Side note:  JFK was not happy with the money creating power of the Fed and he was about to introduce legislation
to take that function back from the Fed and return it to your U.S. Government. 

I enjoy history, and watch a lot of history channel This is one of those little-known semi-amazing facts of the US. As for the legislation, was actually executive order 11110, and the treasury notes were printed. They look similar to federal reserve notes, but there are some 'notable' differences (sorry, bad pun)

 

[Michael]

In our system money is created by banks through lending to business and consumers.

We had banks during the 19th century, and no long term inflation. A dollar in 1800 bought the same amount of goods as a dollar in 1900. It wasn't until the fed was authorized early in the 20th century that we had that we wound up with non stop inflation. It takes 98 dollars to buy what a dollar bought in 1900.

 

[Marshac]

We had banks during the 19th century, and no long term inflation.  A dollar in 1800 bought the same amount of goods as a dollar in 1900.  It wasn't until the fed was authorized early in the 20th century that we had that we wound up with non stop inflation.  It takes 98 dollars to buy what a dollar bought in 1900.

The Hershey 5 cent bar was invented by Hershey himself, and produced (in an effort to maintain his legacy of the nickle bar) from 1921 until 1968 when they company could no longer produce the bar for a nickle. Note the depression era deflation.

1908.....9/16 oz.....2 cents
1918.....16/16 oz.....3 cents
1920.....9/16 oz.....3 cents
1921.....1 oz.....5 cents
1924.....1 3/8 oz.....5 cents
1930.....2 oz.....5 cents
1933.....1 7/8 oz.....5 cents
1936.....1 1/2 oz.....5 cents
1937.....1 5/8 oz.....5 cents
1938.....1 3/8 oz.....5 cents
1939.....1 5/8 oz.....5 cents
1941.....1 1/4 oz.....5 cents
1944.....1 5/8 oz.....5 cents
1946.....1 1/2 oz.....5 cents
1947.....1 oz.....5 cents
1950.....1 oz.....5 cents
1954.....7/8 oz.....5 cents
1955.....1 oz.....5 cents
1958.....7/8 oz.....5 cents
1963.....7/8 oz......5 cents
1965.....1 oz.....5 cents
1966.....7/8 oz.....5 cents
1968.....3/4 oz.....5 cents
1969.....1 1/2 oz.....10 cents
1970.....1 3/8 oz.....10 cents
1973.....1.26 oz......10 cents
1974.....1.4 oz.....15 cents
1976.....1.2 oz.....15 cents
1977.....1.2 oz......20 cents
1978.....1.2 oz.....25 cents
1980.....1.05 oz.....25 cents
1982.....1.45 oz.....30 cents
1983.....1.45 oz.....35 cents
1986.....1.45 oz.....40 cents
1986.....1.65 oz.....40 cents

I cleaned up the units, and made a nice little graph in excel. Edit- note, that's not dollars, but rather cents... my bad on the series name. :