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.
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.
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.
You can double or triple your money !
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
It doesn't have to be that way. But it is.
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.
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.
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."
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.
going again one needs jobs and you have to pay the people if the people make up 70% of the
economy.
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.
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.
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.
whatever you do, dont spend much. thats all.
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.
We are now reaping what the tax cutting, small government republicans have sown. Thanks so much.
The budget deficit didn't jump from the $79 Billion in Carter's last budget (fiscal 1981) to $208 billion in Reagan's post taxcut (fiscal 1983) budget.
The deficit didn't even go from 2.6% of GDP under Carter to 6% under Reagan.
And it's not 8% of GDP today.
Everybody knows you can just go on spending and borrowing and borrowing and spending forever ... as long as you're a republican.
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.