Thursday, March 17, 2011

Savings Rate in the USA

Want to know why our economy is melting down?  Look in the Mirror.  I call it the conspiracy of 330 Million People.

The chart above should concern you - or at least explain a few things.  People are all upset about the economy, and want to blame someone in Washington or Wall Street for their problems.  After all, they are "hard working Americans" who deserve a break, right?  They didn't do anything wrong, other than play the game, right?

And yet, the financial decisions of 330 million people over the last two decades have more to do with the situation we are in, than anything else.   We bought the mini-mansions on Toxic-ARM loans.  (Well, I didn't, but a lot of people did!).  We ran up credit card debts and then paid it off with a home-equity loan.  We bought new cars - or worse, leased them, and then congratulated ourselves for our financial acumen.

And we all stopped saving money - or at least a lot of us did.  Our personal savings rate, as a nation, dropped to zero and then went negative!

Why is this? And how did it affect our economy?

Taking the latter issue first, the savings rate in the USA has historically been lower than in other countries.  Our European friends save double what we do.  The savings rate in China is nearly 50%.  And there is an interesting point.  The Chinese hold a lot of our debts right now - we don't.  Because we don't save.  And they do.

And maybe part of this is the fault of our government.  No one sounded the alarm, or said to invest and save.  And there were plenty of opportunities to do so.  After 9/11, many people wanted to "do something" to help out the country.  And one thing President Bush could have said was "Buy Savings Bonds" - just as during WW II people were encouraged to buy War Bonds. 

But instead, we were encouraged to consume - as if we could consume our way back to normalcy.  And we saw what happened.  People borrowed more and used their homes as bank accounts, cashing in the phantom equity using home equity loans and refinancing instruments.  And when home prices went down, all hell broke loose.  The phantom equity disappeared entirely.

As I noted in an earlier post, your home is not a bank account.  The crazy market of the last decade was an anomaly - a false valuation of pricing.  In a normal market, over time, the appreciation on a home basically mirrors inflation.  Over the years, you will sink hundreds of thousands of dollars into a home in payments, interest, repairs, taxes, and insurance.  And when you sell it, you'd be lucky to get all that money back, adjusted for inflation.

So yea, maybe Alan Greenspan should have said early on that the housing market was whack, and maybe people would have taken it seriously.  He played that too close to the vest, saying only, once it was too late, that we suffered from too much "froth" or "exuberance".   When housing prices rise by double-digits in an economy with otherwise low inflation - and when demographics and demand don't explain the gain, well it is time to pull the fire alarm.

But many people failed to save because they didn't see the point of it.  You could make so much on a house, that it "made sense" to "buy as much home as you could afford" - to stress yourself to make a mortgage payment, instead of stressing yourself to save money in the bank.  If you needed money later on, you could just cash on on your house/bank, right?

That was the theory, anyway. 

So for a large number of Americans, their real net worth dropped over the last decade.  But on paper, they were fast becoming millionaires, as their homes skyrocketed in phantom value.  But phantom equity is not a realization event, it is just an evaluation.  It is not real wealth.

People thought they were getting rich on homes, so they stopped saving.

But I think there are other forces at work as well.

You can see the savings rate start to drop in the mid 1980's - a time when the last housing bubble started, to be sure.  But also a time when Cable TeeVee became popular, and 500 channels of constant advertising became the norm.  People started spending 4-6 hours a day glued to the tube, getting the wrong messages about consumption.

And on top of this, the credit industry really went into high gear in the late 1980's as well.  It was then we started to see these odious credit card deals being offered to college kids and people they well knew could never pay back the debts.  The debt culture was being marketed and pushed.  "Why save money?" they said, "If you do, you lose the  'opportunity cost' in spending it!"  And this sort of nonsense made a lot of sense to our generation - a generation raised on the TeeVee and raised on the idea of "have it all now, pay for it later!"

I suspect the savings rate is probably on the upswing today.  Too late, baby boomers are realizing that retirement is right around the corner and that they have bubkis in the bank.  Better late than never, I suppose.

Some links: