Should Americans Start Saving, or Stop?
Not long ago, at a conference, I heard a distinguished Democrat of long experience dilating on the theme of saving. Americans, he said, used to save. They knew the value of a dollar, and they knew to keep some for a rainy day. Their incomes and their expectations worked as a team. Then, for no easily identified reason, Americans began to spend beyond their means. Experiencing no penalty for this, they spent even further beyond their means. Others, particularly the Chinese, were willing to sell to them and made money doing so - money that they (unlike Americans) had the good sense to save. Now the U.S. is in a pickle. The only way out is to rediscover the wisdom of our forefathers and start saving.
This charge of generational profligacy, in outline, is hardly new, not least because the narrative of modernity (and much of its attractiveness) is based on indefinite material expansion. My parents had their recollections of pinched times during The War (which is why mom continued to clean and save aluminum foil well into the 1970s), and their parents recalled the Depression all too vividly. Punctually every spring grandma would inform us, in one of her weekly letters, that the time had come again to get out grandpa's "summer trousers." On another occasion, it required hours of coaxing and some trickery to get her to accept a second pair of shoes, "soft" shoes, late in life, when she was finding it painful to walk. Those people saved at a level that would have won the admiration of the flintiest resident of Wuhan.
That has not been the American way for a while. The Fed began tracking household debt in 1952 and it has been growing ever since. In the past few years, the personal savings rate actually dipped below zero. That Democrat was right: something had gone off the rails.
So it was with a certain queasiness that I read the Wall Street Journal page-one headline early last week: "Hard-Hit Families Finally Start Saving, Aggravating Nation's Economic Woes." In the third quarter of 2008, the paper reported, household debt actually went down. Goldman Sachs was predicting the personal savings rate for 2009 could be as high as 10 percent.
Why is this, apparently, a disaster, rather than cause for celebration and self-congratulation? The theory is that, in the near term, the American economy needs stimulus, and a critical part of that stimulus should come from consumers. Otherwise the current Mexican standoff - companies cutting back and shedding workers, banks not lending, consumers not spending - will continue.
It makes sense, up to a point. But it isn't as though Americans aren't spending at all. A savings rate of 10 percent will still keep us a bit behind the French and Germans (who don't have our worries about health care and retirement savings), and far behind the Chinese, whose levels are somewhere around 20 or 30 percent (and who have much worse worries than we do about health care and retirement). Besides, the money is not being put under mattresses. It is going into bank accounts and other highly conservative investments. It is available to be lent.
The deeper problem is not consumers' dependence on credit but the American economy's dependence on consumer over-confidence. Consumers can't borrow without lenders. And Americans have for some time had lenders that their parents and grandparents did not have. (I can remember when you had to be pretty darn special to qualify for a Diners' Club card.) Whether these lenders have been "predatory" may be debated but is also something of a distraction. Surely it is obvious by now that the excessive leveraging was a feature of the entire economy, including at the highest levels.
Many have seen this as an indictment of "free-market fundamentalism," and in some ways it is. But it is perilous to lose sight of the role of the state, and in particular the American and Chinese states. It has been American government policy to spend and spend (notably on waging wars), while mostly neglecting the multilateral economic and political negotiations (and domestic tax policies) that might have, so to speak, spread the risk inherent in such extreme deficit spending. At the same time, it has been Chinese policy for the past few years to save: corporations, which are officially guided, saved their revenue rather than distributing it; and official government bodies saved as well. When seen in this broad way, official or quasi-official Chinese savings form a huge share of overall Chinese savings since 2002; and Chinese personal savings rates are themselves understandable in part as a result of official Chinese policy of neglecting individual citizens' welfare.
These official policies, which have kept American inflation down when spending (consumer, government, whatever) might otherwise have fueled it - and which have enabled stable export-led growth in China - have nothing to do with free-market fundamentalism and little enough to do with markets. They represent political decisions to use political tools (principally control of the national currency) to achieve political and economic goals.
The same is true of our various bailouts (American, Chinese, British). Questions are being raised in the West, however, about whether the solution to over-spending is more spending, or whether the solution to private over-leveraging can really be public over-leveraging.
The bond markets have been showing signs of answering no. Corporate bonds have already priced in something like a global meltdown. And it is not clear - the FT had a great piece on this last week - that investors will be willing to buy government bonds on the terms necessary for governments to pursue the stimulus plans they have proposed. The extremely weak response of Britain's banks to official capital infusions is also suggestive: private markets don't really believe the key problem is lack of money.
Obaman policies on infrastructure and education are presumably all to the good, as they aim at increased long-term productivity. The current bank bailouts seem much more questionable. But perhaps the deepest political question is about the currency. It may well be that the U.S. government's hope, if not intent, is to devalue the dollar with as little pain as possible by maximizing foreign ownership of bonds and other dollar-denominated assets. Many commentators believe the dollar has been over-valued for some time. The more the dollar is spread around the globe, the more shared the pain will be of pushing the dollar down to a more sensible level. In this scenario, the spending of, say, a trillion dollars on economic stimulus in the U.S. may not be so terrible in its effects on America's global economic position - as long as enough non-Americans buy the Treasuries. It is hardly a sure thing, however, that the Chinese and others will go along.
The other side of this currency question is demand: the demand, for example, that American consumers are withholding by trying, for the first time in decades, to significantly up their savings. Where will the components of demand come from, then? One guess is that all that pent-up demand in China, which has been one result of Chinese policy, will now have the very beneficial effect (for China) of providing demand for Chinese goods, now that the recession has shrunk demand elsewhere (e.g. in the U.S.).
It isn't hard to see how these trends could lead straight to protectionism and trade wars; right now, I'm having trouble seeing how they won't.
* * * * *
Over the holidays we failed, for the first time in years, to watch It's a Wonderful Life. The film is, of course, about easy credit. The Jimmy Stewart character wants to give relatively easy credit; Mr. Potter does not. Stewart's repudiation of his responsibility to his town leads straight to the loutish, dime-a-dance, tight-credit hellhole of Potterville. The movie is about public-spirited lending, not frugal saving. I had never thought before of how it unites these themes of nationalism and forgiving lending standards. As usual, our forefathers, on more careful examination, don't look much different from us.
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excellent article. Perhaps one of the best Huffpo has posted in a while. More cogent than most by far.
Many posters are correct in suggesting that debt is bad, people should save etc. However a strong understanding of the mechanics of monetary policy, fiat currencies, and inflation turn conventional wisdom on its head.
Debt in an inflationary environment is the key to wealth. While many Americans suffer, those able to service their debt obligations right now are becoming wealthy beyond their wildest dreams. BUy a mansion today, for the cost of a loaf of bread tomorrow.
Buy silver and gold.
Start Saving Aggresively. Its for your own good. Let someone else worry about keeping up the consumer spending. geez.
Only in this country people get a new car by trading in an old car every 4 years. people have to have all the latest gadgets, take vacations by charging it, live beyond their means.
Stop spending. Start saving. leave the consumer spending on others.
Instead of saving go to pawn shops buy great stuff cheap and sell it.
You can double or triple your money !
There are a few things overlooked.
US government policy has NOT kept the rate of inflation low. It has kept the OFFICIALLY REPORTED RATE of inflation low. They mickey the numbers to do that
- substituting "hamburger" when the "price of steak" rises
- seasonally "adjusting" price increases to lesson the effect of sudden price surges like last summer's gasoline prices
- excluding food, health care and housing from "CORE" inflation
- adjusting for "increased satisfaction" when prices go up ... as if a hamburger tastes better and becomes more nutritious just because the price doubles.
The REAL rate of inflation is 3% to 7% higher than the OFFICIALLY REPORTED RATE of inflation, if not more.
In 2008, the OFFICIALLY REPORTED RATE of inflation averaged 4.18%. REAL inflation in 2008 was 7% to 11% ... or more.
Probably more, since the OFFICIALLY REPORTED RATE for November 2008 is drastically deflated (no December numbers yet), while the REAL rate didn't go down that much.
ON THE OTHER HAND ...
Interest rates on savings in 2008 ranged around 1.75% to 3.5% ... up to 5% if you could afford to drop $10k into a 60 month CD - not from an FDIC insured institution mind you.
I'm a compulsive saver, because that's what I learned from my parents and grandparents ... I can't help myself, I have to put money away for that proverbial rainy day.
But it does NOT make sense financially to do so. Nowadays, a "penny saved is a
That should be "a penny saved is a penny LOST!"
It doesn't have to be that way. But it is.
There are different inflation measures. There's the core CPI and headline cpi, which includes food and energy, plus the GDP deflator which excludes import prices and takes into account substitution. The CPI measures a fixed basket of goods while the GDP deflator measures the price of what people actually buy. The argument about the surge in gasoline prices during the summer doesn't make sense because gasoline prices almost always go up from the early spring shoulder season into the summer. Health care is included in the cpi by the way:
http://www.bls.gov/cpi/cpifact4.htm
You're right that the cpi does take into account changes in quality, which can be controversial at times. But to me it doesn't make sense to ignore the fact that any technology related item you buy today is of much higher quality than ten years ago despite being the same or a lower price. Sometimes a higher quality item can be considered a completely new item. I don't understand the anecdote about the hamburger tasting better. Where did that come from? Housing is measured by owners equivalent rent. Otherwise, housing is an asset, which means when one person pays up a house, everyone else with a similar house in a similar area sees the value of their house increase an equal amount and they benefit (except for increased property taxes). This is asset price inflation, not consumer price inflation.
Well I doubt it it is a confidence issue. It is the lack of funds. After the wife lost here job and I took a cut in pay to keep mine, we are still willing to spend and save. We simply do not have cash. At 0% interest who in the H*ll would save anything anyway.
Amazes me how the "talking head" Media announcers and experts who have done all this for 8 years do not know what they have said about job loss, wage stagnation, $10 Trillion tax cut for the top 400, and 15% capital gains
Let's see $0 investment at 0% interest = 0 appreciation
Kerry's wife, $5 million return in 2004 from daddy's business wealth trade in stock at (DOW 7000 to 14000 = 200% increase in appreciation. 40 to 1 leverage is 8000% in appreciation reinvest for 0% tax or withdrawn for 15%
Now if I lost all of my invest at 0 invested and appreciation I loose nothing. But if I had $5 million at 8000% and new we had a recession a year ago. That was denied by Media, Experts and Admin till now. It would only cost 15% of the 8000% of base and appreciation that was made to withdraw from the market. Now that the market is at DOW 8000 I can reinvest as the market shoots up with all the keynesian economics.
Money is the leading Industry in America.
It's easy to save money when you don't buy a lot of "stuff." If people honestly looked at their closets, they'd see an overabundance of clothes, shoes and jewelry that they don't actually need.
I can't tell you how many times I've heard, " I went to the store and saved so much money." If I'm in a joking mood, I'll retort with, "No, you went to the store and spent money."
In fact the level of consumer debt has kept about 50% of American businesses viable during the beginning stages of what is called "globalization". The problem at this point is that savings is not an option but paying down debt is a must. This will ruin the economy unless we begin to manufacture at home and develop what are termed "protectionist" policies. If anyone thinks that Americans are going to save, they are misinformed and have not seen the stats on individual consumer debt. Saving does not balance out the rising interest in carrying debt for long periods of time. Paying down the debt is a form of savings and that is where the money is going to go. In the meantime the economy will come very close to a crash because the system needs to rebalance. So call Globalization has left America without jobs, people are up to their knees in debt with no employment prospects in the near future. Bankruptcy will become a more viable option for most people as despite the problems associated with it, much more money can be made liquid quicker. If people retain their debt they have only a long dark tunnel ahead. So basicaly there will be a lot of defaults which will further kill the economy.
Has anyone else been struck by the anticipation in this discussion of people choosing bankruptcy/default? How does that fit in with our stories of responsibility and saving-v.-spending?
Cylindar, can you describe more these "protectionist" policies you're thinking of?
btw after I posted on Sunday I saw an interesting post by Sherle Schwenninger on many of these themes. (Sorry I didn't get to it earlier, Sherle!) you can see it at the New America site -- http://www.newamerica.net/publications/articles/2009/how_save_world_9684. I heard about it at Steve Clemons's Washington Note. ... sherle argues that domestic stimulus/rebuilding needs to be complemented by making China and other surplus countries stimulate demand for american goods by their own consumers. i'm not at all sure how that would be done; sherle does mention protectionism, or the threat of it, as one tool. which i imagine would interest Cylindar.
Protectionist policies would mostly be counter-productive because they'd result in retaliatory measures and serious dislocations in the global financial markets, probably resulting in a much worse recession than we have now. The US could take more trade cases to the WTO, but I doubt that would make much of an impact over all. President-elect Obama has talked about closing the tax loophole for domestic companies foreign operations but that likely won't bring any jobs back here, though it may prevent a few companies from moving a facility or two abroad. Overall, I think the key to the trade deficit is reducing our dependance on foreign oil and increasing interest rates accordingly as oil prices rise.
Wonderful Life is not about credit, it's about control and the free market. It is about whether there are enough good people to keep a free market alive. The New York Financial elites, are in essence the "Potters," not wanting a free market. From the oil crisis to the mortgage mess it's all the "Potters" in New York we can thank for our ills. The defining moment in the story is when a young Jimmy Stewart turned down Potter's offer to be a rich man, in favor of his customers right to have a decent life. What Wall Street Baron at Goldman Sachs, JP Morgan, MorganStanley could say the same thing..... not one.
1% of the rich now own 40% of the world's riches. This was planned. In order to get the economy
going again one needs jobs and you have to pay the people if the people make up 70% of the
economy.
One should try to live below their incomes, putting the excess away into savings, as well as have money taken out of their pay for their 401(k) account in a well managed long term fund. Credit must be used wisely, for major purchases mainly and within one's ability to pay back, even if things go bad. One should try to have several months of income in the bank for the 'rainy day' or emergency that will happen in their lives. We also need to teach our children the value of work, of savings and of careful spending from an early age. Problem is that many adults never learned such values or spend on thier children out of guilt as working so many hours and it is easier to give in to demands for things than using reason.
Until we make major changes including to encourage reasonable spend and savings, it will be difficult to get out of our long term financial crises.
"Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery"--Wilkins Micawber
To compare the savings rate in the US to that rate in other countries, especially China, can be very misleading. This is because money that Americans put into 401Ks and IRA isn't counted as savings, nor is 401K company matching. Countries like China don't have such retirement vehicles, nor do they have Medicare and social security to keep them more secure in old age, thus they have to save more for their own retirement to cover those costs the US govt covers here. Second, credit card debt is not the reason for the low savings rate either. Statistics show that consumer debt makes up only a small part of overall financial obligations, and the percentage of that debt relative to disposable income has actually been coming down since 2002 and isn't much higher than what it was even in the 1980s. The biggest portion of household debt by far as well as the one making the biggest increase in household expenditures over the past ten years- and everyone should already know this - is mortgage debt. And by the way, the quickest way to lower this debt is to default it. Other than that it's just time.
I cant believe I have to spell it out.
For your benefit, you must save as much as you can. Hopefully for economy's benefit, your neighbour will spend beyond your means.
if all of you save, the economy loses. if you dont save you lose.
simple.
You lose if you DO save. Inflation in 2008 averaged a little over 4%.
Savings accounts paid 1.75% to 3.5%.
Don't matter whether you save or not. The game's rigged so either way you lose.
And, I might add, that's the OFFICIALLY REPORTED rate of inflation. Figure the REAL rate of inflation is anywhere 3% to 7% more than what the Government says it is.
when people say save, that means SAVE & INVEST. i didnt say to sock all your money in a low paying cd or savings account. buy stocks in solid companies that are in oligopoly industries. do research, subscribe to Morningstar.com. possiblities are endless.
whatever you do, dont spend much. thats all.
I appreciate the honesty of this stumbling examination of current financial conditions; the only alternative to being overly complicated is to over-simplify.
So spending is always "spending for what" and savings also "for what." The turmoil we are in is immensely complicated. If by "over confident," you mean that it's like going into the gambling parlor with the attitude that you cannot lose, that's delusional. And, yes, try to avoid delusions.
If by "over confident" you mean that the US electorate has been electing "It's morning in America" lying politicians for too long a time, find out who it is who have been promoting those lies for too long a time. The records of the mainstream media passing along lies are clear and scandalous.
So, here we are. We have been lied to for nearly two generations. Recall, if you will, that Reagan won his second term telling Americans he would cut taxes while Mondale said it was necessary to raise them. Who was right?
After seeing the results of Americans being sold the lie that prosperity did not require responsibility, we know who was right. The American voters were wrong, because journalists passed on the lies. The logical consequence of that is bankruptcy. The only remaining issue is whether we have learned our lesson.
We have begun to dig ourselves out of the hole we are in. That's always harder than falling into the hole. So just keep digging out.
The Reagan tax cuts have nothing to do with the current financial and economic crisis. Cutting the top rate from 71% to 50% in his first term was not in any way a bad thing.
Try selling the virtues of small government in New Orleans. Reagan and Bush and Bush never cut "waste." All they cut were those pesky regulations and regulators, and inspections and inspectors.
We are now reaping what the tax cutting, small government republicans have sown. Thanks so much.
Very nice post and many interesting thoughts. I have always wondered, why it should do an economy any good, that everybody is encouraged to spend (unproductively) even beyond their means. The spin was (and is) that spending helps the economy, is patriotic even.
Saving, however, is also problematic, as it is my understanding that money is a means of transfer and not a means of storage. As Warren Buffet once said, it is like saving intercourse for old age. Given this viewpoint, a system that encourages saving for retirement rather than redistribute simply from the young to the old as in some European contries, seems problematic.
And, lastly, saving, putting the money in a bank for a low specified interest rate, is risky. In a year or so, inflation will inevitably pick up, maybe even violently. It is easier for any government to print money rather than to default on the debt incurred. It is politically costly to fight inflation and I doubt the new adminstration will fight it in earnest until a lot of monetary value has be lost due to inflation.
So, I would recomend to stop unproductive spending and to save, if you belong to the happy few that still have funds to save. However you should not put the money in cash into a bank account. Rather, buy some of the now cheaply available assets.
If it is any consolation, the happy many that have nothing will not loose much in runaway inflation.
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