Monday, January 30, 2006

All hail the housing ATM

The American consumer turned in his/her third lowest personal savings rate of the year in December, -0.7%.
Personal outlays -- PCE, personal interest payments, and personal current transfer payments increased $81.3 billion in December, compared with an increase of $49.8 billion in November. PCE increased $80.2 billion, compared with an increase of $48.6 billion.

Personal saving -- DPI less personal outlays -- was a negative $67.4 billion in December, compared with a negative $21.6 billion in November. Personal saving as a percentage of disposable personal income was a negative 0.7 percent in December, compared with a negative 0.2 percent in November.
And remember that this massive consumption in lieu of income delivered only a ho-hum Christmas season for US retailers.

There will be minor revisions to come, of course, but we now have the first clear look at the personal savings rate for all of 2005: -0.5%, down from 1.8% in 2004. Not only is the US running the first negative personal savings rate since 1933 (yes, I know you're getting sick of hearing that from me, but it bears frequent repeating and at least the press is picking up on it too). This is an incredibly steep descent as well, -230 basis points in a single year. The last time one can find such rapid abandonment of saving out of income in the US was 1947 when the country was at the tail end of a three year period of dissaving after years and years of pent-up demand due to WW2. The lowest the saving rate ever reached then, however, was +4.3%.

Well, as long as the East Asians want to stick more and more of their growing and growing reserves into the US housing sector, some Americans can go on using their homes as ATMs. In fact, it seems the only way to keep the US economy -- and the global economy -- from plunging into recession.


At 9:28 PM, Blogger Richard said...

many 'experts' discount the savings rate statistic since it doesn't take into account an unprecedented boom in housing values (of which 70% of americans participating being homeowners) and it doesn't include 401k and other investments. still savings is subject to no risk while the other sources of savings can change on a dime. the posit that housing prices never go down will be sorely tested in the near future and stock values have definitely been prone to big drops of which the most recent in 2000 we still haven't recovered from.

americans are living in fantasy land thinking they can sell that inflated house to some other dope and cashing in their 401k and live high on the hog till their end of days. it's just plain irresponsible and downright foolish.

At 10:03 PM, Blogger dryfly said...

Richard... they will be able to live 'high on the hog till their end of days' as long as living high on the hog means a nicer appliance box on the street than their neighbor.

At 8:02 AM, Anonymous Anonymous said...

Assume that half of all consumers are spendthrifts, and spend well beyond their income. Then eventually they, and the country, would be in financial trouble. Assume that the other half of the population are misers who save a large fraction of their income. I do not understand whyit is important whether the spendthrifts spend more or less than the what the misers save. Or to say it differently, why is it important whether the personal savings rate is positive or negative?

At 10:11 AM, Blogger Kirk said...

Anonymous, in a word: bankruptcy. In two, ripple effect.

Part of how the misers are paid is by assumption that the spendthrifts can make good on their debts. When the spendthrift defaults, balance sheets of companies that have receivables as assets take hits. The inventory that went to the spendthrifts is a loss - either it's inventory given away or it's inventory that sits unsold on the shelf, either way it's inventory that cost money but isn't generating it. If my net sales are 10% of my gross sales and I am suddenly told that half my sales are defaults, I'm looking at a net loss. If I wasn't being careful that net loss means I'm now out of business. Which means that the misers that I employed are now unemployed and living off their savings - another "negative savings" statistic.

Note that's a simplistic model, but the broad outlines are applicable.

At 10:13 AM, Anonymous Anonymous said...

"Or to say it differently, why is it important whether the personal savings rate is positive or negative?"

This may be a bit simplistic, but have you ever heard the story about the ant and the grasshopper? The ant worked hard all summer and stored up food (savings) for the winter (recession), while the grasshopper played all summer and did not. When winter finally arrived, the ant had his food stores to rely on, while the grasshopper died of starvation.

Right now we have lots of grasshoppers and not very many ants. And it looks like we in for a really long and cold winter.

At 2:22 PM, Blogger Emmanuel said...

Does this ultra-jihad on fiscal prudence put to rest the notion of Ricardian equivalence? The brainless nature of government and consumer spending combined is something to behold. Shop till you drop cos' this party won't stop.

At 4:37 PM, Anonymous Holly W. said...

Emmanuel, sometimes I wonder if we're suffering some kind of weird national psychosis with this borrow-and-spend fever ...

At 5:01 PM, Anonymous Anonymous said...


I still don't understand. Those spendthrifts will eventually hurt everyone else whether or not the total national personal savings rate is a little positive or a little negative. Why does Gen Glut, and others, worry about the total national savings rate, and the fact that this sum is now negative. The damage to the economy will still be done if the total savings were positive and there were still a lot of spendthrift bankruptcies. Why is the total important, especially when the total money supply is not fixed?

At 6:42 PM, Anonymous Michael Cain said...

But to convince the Americans who would do the bulk of the savings to change things, you have to convince them that the capital gains they see in their quarterly statements and real estate appraisals are not real.

"Of course I saved last year," they say, "Just look at these account balances! Look at the county's assessment of the value of my house! My 'savings' balance increased by 10% of my income!"

"But that's not real," you try to tell them. "Excess global liquidity, asset inflation, it's not real investment, it's not savings! S=I=Y-C!"

"Poo!" they reply. "Is that what they teach you in graduate school? No wonder we don't pay attention to economists..."

At 12:45 AM, Blogger Tom DC/VA said...

Anon -

Whether or not a country is saving as a whole matters in that eventually foreigners will come to own a country that doesn't save enought to cover its own borrowing needs. One person's savings is another person's loan taken out to build a new factory, lay new fiber, etc. However, it is important to look at how far along the country that is doing the net borrowing is in the industrialization process. If a country is not far along, but able to grow rapidly, net borrowing in the short term will be paid off by that country's rapidly growing productivity over the long term. If a country is very far along in the industrialization process, any net borrowing will hang around longer because the new investment will increase productivity by much smaller amount.

At 6:26 AM, Blogger vader_jg said...

The Sick Man of Europe, 1850–1922

The conflicting interests of European states propped up the Ottoman Empire until after World War I. Great Britain especially was determined to keep Russia from gaining direct access to the Mediterranean from the Black Sea. Britain, France, and Sardinia helped the Ottomans during the Crimean War (1854–56) to block the Russians.

The Russo-Turkish War of 1877–78 brought Russia almost to Constantinople. The Ottomans were forced to sign the harsh Treaty of San Stefano, which would have ended their rule in Europe except that the European states called the Congress of Berlin. It succeeded in propping up the old empire for a few decades more (see Berlin, Congress of).

There is a presidence for the 'world; to prop up a dying empire.

At 10:01 AM, Blogger Epimethee said...

general, your last two posts have contradicting titles :
1 the end of cheap credit
2 more credit taken by foolish spend and borrow americans

The content is OK, the titles look bizarre when confronted.

To whoever wants to know why the total of savings is important :
a of couse it is important to know how the savings are concentrated. The more concentrated they are, the more risky it is.
b there seems to be a correlation between the level of saving and the level of concentration of savings.

Phrase it like this in high sound growth egalitarian countries, savings are high accross the board because of rising wages.

In middle unsustainable growth unequal countries, savings are low and made exclusively by asset holders because of rising profits.

Finally the problem of saving is not only related to default risk, it is related to demand, and the financing of investment.
If savings are low, then investment must be financed by something else : for instance foreigners, so the country is reliant on foreign investors. Not always a cool situation.
If savings are high, then they have more chance to fall, than to rise (and vice versa), a fall in savings boost demand, a rise in savings curtails demand.
Hence, if you have already tapped your savings then your demand (spending) is bound to fall in the coming months/years.

Let's say the chinese (barring massive bank failures, and that may well happen soon) have more of a cushion than the americans.

At 12:32 PM, Blogger Kirk said...

Anon, epimethee made several good points. I'll also note (in line with my earlier remark) that it's a measure of fragility. When spendthrift goes bust it hurts some misers. It also hurts more spendthrifts, who subsequently go bust and hit everyone again.

Think of it as a chain reaction. When a spenthrift goes bust he hurts both misers and other spendthrifts. Misers have a chance of riding out the bust and not going bust themselves - eroding, but not collapsing. Spendthrifts, on the other hand, are more likely to go bust themselves.

A negative savings rate tells us that either there are more spendthrifts than misers OR that the spendthrifts we have are significantly more wild than the misers. Remember that the number isn't "average put into savings", it's "percent of personal income that isn't spent." In other words, nationwide more money is being spent than was earned last year.

So the basic concern over negative savings rates is that we have no damping rods against a financial collapse. There's no net, and we're sawing at the tightrope. We may get away from it - it's not in itself a guaranteed collapse - but it's very worrisome. Which is why so many of us are concerned about it.

At 3:34 AM, Blogger Epimethee said...

I should have added, big savers are in fact big lenders, they lend to the spendthrifts, if some borrow too much, that means others lend to bad borrowers and wrongly think they have a safety net. For instance chinese could wake up one day and wham, 50% of their savings has disappeared in a US crash.

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At 7:06 AM, Blogger Delonix Radar said...

Better turn that savings record around, we only have a year and a bit left,


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