Friday, December 02, 2005

The magic of negative savings

Dear Uncle Alan seems concerned that the US federal government spends dramatically more than it receives in income. Too bad he's not terribly interested in American households doing the same thing.

To demonstrate how dependent the contemporary US economy -- and by extension of America's role as the buyer of first resort (remember that we're screaming towards a $725bn trade deficit this year), the global economy -- is on the indefatigable yet income-short American consumer, consider what third quarter GDP growth would have been without it.

In 2005:III, we recall, real GDP growth was a pretty impressive 4.3%, the highest in six quarters. Nominal GDP (SA) stood at $12,601bn, up from $12,378bn in 2005:II -- thus a nominal annualized growth rate of 7.2%. However, nominal US personal saving (SA) was $133bn in the red in the third quarter. If Americans consumed with a 0% savings rate in 2005:III rather than the actual -1.5% rate, nominal GDP would have been only $12,468bn -- or a nominal annualized growth rate of 2.9%. Not quite so impressive.

But what is all this in real terms, you ask? Good question. In 2005:II, real GDP in constant 2000 dollars stood at $11,089.2bn. Using the PCE price indices from the BEA, we find that with a savings rate of 0% in 2005:III, real GDP for the third quarter would have been $11,087.2bn. It doesn't take a math genius to see that real GDP for 2005:III with a 0% savings rate would have been lower than in 2005:II -- and have generated a 0.0% real growth rate.

In short, without negative savings and all other things being equal, the US economy would be at a standstill. Now that would have been one hell of a headline.

48 Comments:

At 6:26 AM, Anonymous Anonymous said...

Now, general, if ifs and buts were candy and nuts...well, ah fergit how the rest of it goes, but yer kinda doin' one uh them counter factual type uh inferences there, when ya talks about the eeeeconomy without negative savin' and such. but the fact is negative savin' is a real part of this derned corrupted system that we got uh goin' here. and frankly, when ah read mah "Structure and Change in Economic History" by ol' Douggie North ah recall that economic history is plum full of monopolistic situations that don't pay the least tidbit of attention to what's right and rational for decades, scores, and even centuries, when they gots the clout tah make it stick on them that they're uh puttin' it to. Now, ah agree that if'n the system is allowed to operate based on supply and deeeemand more or less with out insteeeetutional biases and stickiness and such, whah then we gonna be in uh world of hurt faster'n ah can say Nachdoches Meat Pie. But from down here on the bottom of the underside of the sub basement of the pyramid with the eye ball on the top of it lookin' off the back of a Fedeeeral Reeeeserve note, whah ahm'a just not too sure how fair and rational ever things bein' run right now. Seems like a heap'uh written and unwritten insteeeeetutions is uh biasin' and sticky-fyin' outcomes here, general. ah mean, what're we gonnna do, general? either things is so corrupt ol' man supply and demand ain't'a ever goin' to get uh chance tuh operate, or we're all gonnna wind up in the poor house sold into some kinda new world order indentured servitude, er, just plain peonage slavery.

Sincerely,
Corporal Glutt

 
At 12:58 PM, Anonymous Anonymous said...

General - fantastic post. Very important I think too, as it corollates the savings issue with the top line GDP headlines.

In sum, you're pointing out the beginning of a slowdown, which feels about right given other numbers.

 
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