What Will Happen If America Returns to an Historical Savings Rate?

A lot of the focus of the punditry is when we'll recover - personally I think it's a bit of a moot point. What I'm thinking through is not when, but what the recovery will be in America. I posted many of my thoughts in [The US Economic "Recovery"], but essentially a lot of cross currents are forming which should make for a very interesting 5, 10, and indeed 20 years ahead.

Much of the current recovery thesis is based on (a) government spending replacing private enterprise and (b) coaxing Americans back to their old habits. But I'd like to ask what are "old habits?" - most of us in our 20s, 30s and 40s know one reality; our context of history is very different than one who has a longer precedent to view. So let's take a few steps back and I will give you some insight on why I think we're not going to be going back to the binge we've just left for a long time, and why I appear to be so negative on any near term "recovery" relative to reaching anywhere near the potential of the economy. No we won't be at a -5% GDP figure quarter after quarter for years on end, but what will the "recovered" America look like?

There are many global structural changes happening slowly but surely [Do the Bottom 80% of Americans Stand a Chance?] which I believe will bring the standard of living (and wages) into more of an equilibrium across developed and developing countries. For humankind, that is a net positive, since many on the globe live in stark poverty, much of it based on nothing more than what mother they are born to, and in what country. But for those at the top of the totem pole, it will mean a harsh readjustment downward for many within the society.

I believe this is not a prediction, that in fact it has started in the lower rungs of society and it's been working up the food chain to the middle class. I won't go into my long term predictions for the country, but I believe we will be "forced" into a more European model (safety nets, healthcare, higher taxes) as job security is in a constant state of threat and as capital floods to the lower-cost countries safety nets, healthcare, higher taxes. It has to happen here eventually because many more pieces of our society will be subject to the forces of globalization (both good and bad) and demand protection for our living standard. This is a lot bigger than a "recession" - the recession is a symptom of the national disease.

Median wages have not increased (adjusted for inflation) this decade, and the stratification of wealth has become more concentrated in the top percentage than any time since the 1920s. Political dogma has thus far allowed this to happen as the citizenry has been busy pointing fingers at each other rather than looking at why these things are really happening. While the reasons could be debated, the facts are the facts. I believe the past decade, many in the country have been compensating for their lack of wage growth with leverage (borrowing). The house ATM was just the apex of a credit bubble that has been building for a long time and obviously peaked in the middle of this decade.

I'd like to present the graph below which shows the historical saving rate of Americans since the 1960s. (click to enlarge)


As you can see, Americans used to save. They used to act quite near our European and Asian friends

People keep asking when Americans will go back to their old ways, as if saving 0% or 2% is our old ways. Not really - that's our most recent ways. But let's peel back the onion.

In the 1960s, Americans typically saved in the 7.5% to 10% range. A bit below where Germany has been the past 15 years.
In the 1970s, Americans typically saved in the 8.0% to 12% range. A bit below where France has been the past 15 years.

Then something changed in the mid 1980s - call it culture, call it entitlement, call it lack of financial literacy - call it what you may. The reasons are immaterial for our purposes, we just care about the raw numbers. After being over 8% for just about all of the 1960s and 1970s, the savings rate has never hit that level since 1987.

Between 1987 and 1993, Americans typically saved in the 6% to 8% range.
Between 1994 and 2000, Americans typically saved in the 4% to 6% range.

Uncle Alan Greenspan's "easy money" policies (year 2k baby!), 9/11 easy money policies, 0% financing for cars, furniture, deregulation of financial institutions, crazy mortgage - all that marked 2001 onward. The above mentioned stagnation of median wages (inflation adjusted) for many in the bottom 2/3rds of the country also was a trademark of this decade. Jobs that were not outsourced could be "threatened" with such, wresting power away from workers - and inflation began to soar in health, tuition, all the normal culprits.

Our saving rate plummeted to 0-2% for much of the decade, famously dropping to a negative rate at the peak of the housing boom in 2006. Literally we spent more than we had as a nation of individuals.

Didn't globalization and wage pressures affect Europe just as much? Why did their savings rate not plummet just the same to compensate? In my opinion, part is culture (Germany/France versus UK) and part of it is workers protections. In the "socialistic countries" (the ones not recently named U.S.A.R) worker protections and unionism are high. It is very hard to fire, so companies are reluctant many times to hire. But once your "in" you're gold - sort of like public school systems and the teacher unions. So wage pressure is lower.

Contrast that to the more open UK, which has modeled itself after the US (while retaining safety social nets/healthcare for all that the US lacks); its saving rate has also plummeted and corporations tend to run more free with the ability to hire/fire much more readily than those countries on the mainland. That's part of the "flexibility" the dogma tells us is necessary to "react to globalization".

Now the interesting case study that supports my theory is Japan. They used to be very high savers with solid worker protections. But now they also have embarked on U.S. style worker rights where humans are commodities. I won't pretend to be a Japan expert, but the more I have been reading the past half year, the more I see they have adopted a lot of principles that make their corporations "flexible" over the past decade - i.e. huge influx of temporary workers, birth of a generation of working poor - i.e. similar to our service industry, huge growth in the income gap, pulling back benefits, et al. As we saw in [Oct 28: Pooring of Japan Too?]

• The 29-year-old laborer is one of a burgeoning class in Japan -- the working poor. The number of Japanese earning less than $19,610 a year surged 40 percent from 2002 to 2006, the latest data available, the government says. They now number more than 10 million.
• "It is unprecedented to see such a widening income gap in Japan," said Yoshio Sasajima, economist at Meiji Gakuin University in Tokyo. "Our society is definitely becoming a class society."
• In the 2000s, that was followed by a round of free market reforms that widened the disparity between haves and have-nots. (sounds vaguely familiar)
• A key to the growth of the working poor has been the explosion in temporary employment agencies, which allow corporations to take on labor without having to pay benefits -- and then unload workers at will. (sounds vaguely familiar) "Instead of hiring costly, full-time employees, companies are bringing in cheaper, part-time workers as part of their cost-cutting efforts," said Yasuyuki Iida, an economist at Komazawa University in Tokyo.

So as these "reforms" have taken hold in Japan (strengthen corporation, weaken worker), the saving rate has plummeted from 12% to 6%, and now from 6% to 2%. People try to maintain "old lifestyle" with "new compensation" which is less than old compensation (inflation adjusted) - hence savings deplete. Those are my theories, and of course they can be argued. Eventually I think as more U.S. workers become disenfranchised and lack of stability engulfs the working class as they compete with wage earners in developing countries, a major backlash will happen in this country and indeed others that have adopted the "dog eat dog" capitalism structure. Perhaps it's fruitless for workers, and most corporations will move plants to locales were labor is cheapest - I don't know. But it will prove to be a very interesting era ahead.

As Uncle Ben Bernanke sits here and destroys American savers (just imagine the 65+ crowd trying to live on these CD interest rates), the master plan is to return Americans to spenders so we can kick the can down the road. But what if Americans do what is best for themselves (save) and not for the "service based economy" (spend like drunken sailors)? What happens if we don't return to 0 to 2% saving rates but seeing the increasing lack of job stability and stock market shenanigans (where many of our retirement savings are), not to mention a country that should have anywhere from 1 in 4 to 1 in 3 people "underwater" on their homes by this time next year - turn back to our real "old habits"?

A 10% savings rate? Could it be possible? What would that translate to in real dollars?

We have about a $13 Trillion economy, with about $10 Trillion in private spending. (one could quibble the exact number, but it's within a degree of that and $10 T makes for a nice round number). A 10% savings rate very easily translates $1 Trillion in savings. A 8% savings rate translates to $800 Billion. Even a 5% savings rate translates to $500 Billion. All these numbers exceed the next stimulus plan on an annual basis, which means all the government would do is borrow from our grandchildren, layer more debt on them (that we need to eventually pay) to offset money from our "old economy model" (of the past 6-8 years) as Americans, in self preservation, move to the real "old economy model" (of the past 40 years).

I don't know if this is the outcome - I am a saver by nature so I don't understand how many people live the way they do. I don't know how their "sentiment" will change or if they will repeat old mistakes in the near term. I'd like to think they would be scared straight after seeing what is happening now and a saving rate re-emerges nearer to historical norms. That would be a very healthy long term situation, but a horrible one for an economy which has been transformed to rely on spending over our heads. I do know a great many Americans are retiring (or trying to) with little to no savings - and what many had was in their homes, which are falling in value for the first time nationally since the Great Depression.

I wonder how these people will "spend" at previous rates when they will struggle just to subsist. I continue to believe that even at 0% interest rates, many people, with depleted savings simply won't want more debt at any cost; they will be too busy trying to rebuild balance sheets depleted by a decade of global forces/bad behavior. Which leads to my gloomy view of any economic recovery that rekindles images of the middle part of the decade. I don't think a Japanese style decade plus hangover is out of the question.

If I am correct, consumer discretionary items will continue to suffer far deeper and longer than the pundits and hedge fund thesis algorithms currently posit. I do not believe these pundits and PhD programmers at hedge funds understand the median wage in America is about $30K (meaning half make less). Many declaring impending recoveries probably make this wage in a month. There are two Americas, and the punditry does not live on Main Street. Unfortunately the non punditry portion of 2 Americas need to drive this economy.

If I am correct, my bearishness for retailers (non-grocery, non-essential) will last much longer than those who run up said stocks on "early cycle" thesis, as they will do repeatedly in 2009 (as they have done prematurely multiple times in 2008). We are overbuilt in America - in almost everything; "right sizing" will be a long, painful process and those who dream this all gets solved in "6 months" due to easy money need to look back at our history. Remember, our country has SIX times more retail space, per capita than any other nation. If we take $800 Billion to $1 Trillion of spending (8 to 10% savings rate returns) out of the economy and into personal savings on a permanent basis - what do you think happens to a lot of that space? Will we approve 2 year, $800 Billion stimulus plans every 24 months to offset this? (kick the can forever?)

The case against me? Within 6-12 months, companies suddenly decide 6-8% wage increases are the new 3%. Or the US consumer will be back to their overspending ways and the small rebound in savings rate (2%ish) will retrace back to 0% or negative. The irony is that is not a positive outcome - it's just kicking the can of an eventually down the road. Which is what we specialize at; and our government is encouraging it.

• The good news for retailers reeling from the holiday sales season is that 2008 is almost over. The bad news: The fallout in 2009 could be worse. This year's retailing slide -- when stores were forced to cut prices to convince wary consumers to spend -- promises to have a lasting impact on the way the retail industry operates. Many retailers are rethinking how they do business, as others prepared for a large number of bankruptcies and store closures.
• Other retailers are saying they will trim inventory and reduce the number of suppliers. That, in turn, will cause a ripple effect, prompting a number of weaker manufacturers, small brands and underfunded fashion labels to fail. New retail formats and concepts stores are likely to be curtailed in the coming year.
• "We will have a lot fewer stores by the middle of 2009," says Nancy Koehn, professor of business administration at Harvard Business School. "It's happening very, very quickly because of the financial crisis and the recession." Analysts estimate that from about 10% to 26% of all retailers are in financial distress and in danger of filing for Chapter 11.

Unfortunately we don't have great outcomes either way - it's either take the pain now and re-adjust back to the "old" consumption patterns, or kill savers who acted responsibly while force feeding debtors to take on more... so that we can have the next consumer crash down the road 3-6 years - instead of now.

Until then - we'll stay in denial talking about how things will go back to "normal" in "6 months" as the federal government saves us.

Comments

[bhensley:]

fabulous! just an excellent article.

2008 Dec 30 08:29 AM

[WebWatcher:]

Excellent article, we got to look at the fundamentals and correct all the way or most of the way to where it should be, not predicting based financial stats, meaningless and harmful.

2008 Dec 30 08:30 AM

[silverwink:]

Enjoyed this article. Well thought out and clearly stated.
It will be interesting to re-visit in 12 months as we see how the story unfolds.

2008 Dec 30 09:06 AM

[surgeon:]

Good article speaking the truth.
One point to add is that most of the people were borrowing to live the life style they could not afford. They were not earning more to spend more. They were borrowing to spend more. Hence no savings.

2008 Dec 30 09:16 AM

[a fat panda:]

I like your article, and interesting thesis. I think that you are missing the demographic graphic changes which will put a downward pressure on savings. As people get older, ie retire, they save less and less. Look at Japan. You should also address the impact of stock options on savings. In the 90s, the incentives to buy stock were insane. The stock options held by average workers have been killed.

2008 Dec 30 09:30 AM

[aristid:]

excellent article.
it shows us why france and germany do not like to reflate by lowering
fast and in big steps interest rates. it would eliminate the buying power of the savers even more then the reflationary effect. said by mr. Trichet and G finane min spoksmen. it should be noted in comments acusing these two countrys as laggards.

2008 Dec 30 09:57 AM

[tdillian:]

excellent article!!!

I am in my 20s ... and I have seen what you described in your article so many times. My friends, some in their 20s, some in their 30s, buy anything and everything that want... all on loans.. credit cards.

I have never understood how the heck they can stand owing so much money. But now.. I am shocked to find they for the first time, are not buying crap they can't afford. One of them used to throw a huge new year's party, buy a case of good champagne and other things... this year, guess what? he is not throwing his yearly party, and in fact he is not hosting anything.. he wants to save as much as he can, he works in silicon valley, and if people think that that area is immune from all this spending cuts, they are kidding themselves. People here are literally scared that they will be cut in the next rounds of layoffs... no one wants to spend anything.

Again, to the author, wonderful article!

2008 Dec 30 10:04 AM

[investor88:]

Look for the economies worldwide to degear to a lower sustainable level over the coming decade. This may be good for the longer term but pain in the short/intermediate term.

2008 Dec 30 10:07 AM

[Genti Cici:]

One of the best article for 2008. Good job putting it together. I totally agree with you, I am just afraid that most people (in US are spenders, not savers) and will choose the easy way out (kick the can down the road, to hit us in the face later) because the right path is just too damn HARD, and we have been spoiled having all our wants satisfied for the last couple of decades.

2008 Dec 30 10:07 AM

[Guero:]

I half-expected a bunch of rants in the comments section about "socialism" & "Marxism" and other nonsense, but you are hitting the nail on the head sir. It is what it is. We are looking a a major re-alignment of our economic system, because what we were doing before was not at all sustainable. You can't keep buying cheap crap from China at Wal-Mart, trade in your SUV every two years, and regularly gorge & puke at the all-you-can-eat buffet without having the bill come due eventually.

Our consumption-based economy was overdue for a crash, but unfortunately that over-consumption is exactly what our "wealth" was based on. A sick, parasitic arrangement.

2008 Dec 30 10:25 AM

[Midwest:]

Excellent article with plain old common sense used as its platform. If people save, the economy suffers early and hard. If they spend, the economy suffers later but at greater length.

I've been putting 10% in my 401K for several years but that was after I lowered the contribution rate so I could try to pay off my substantial credit card debt earlier. Otherwise, I was contributing 13%.

We're all spending less, and for some time (look at 07's holiday season let alone 08's), and I predict we will remain this way for 18-24 months. Unless there is a significant middle class tax cut, combined with deleveraging by consumers and a decent savings rate, the American economy will be on life support for much, much longer.

2008 Dec 30 10:44 AM

[a. palmer jr.:]

One thing I didn't see mentioned in comparison of Japan to US is America's growing illegal (and legal) immigration problem. People flocking in here by the thousands to take what few jobs that are left after corporate America decided to head for greener pastures.

2008 Dec 30 10:54 AM

[keithofrpi:]

Thank you for this good effort at visualizing the future. I do not agree, however, that the economic trends you identify since 1980 "just happened" or result from globalization. They are the direct result of Reaganism, an ideology that strips the government of powers and resources, while leaving the top executives of business free to take what they can. In other words, our political choices shape the economic environment. Note that the trend was interrupted and somewhat reversed under Clinton, but resumed with a vengeance under W.

2008 Dec 30 10:56 AM

[Unrepresent...:]

I'm not worried. Everything we are going through now was entirely Bush's fault, or at least that is the common perception. Our incoming Messiah Barry O. has all the answers and he will make things right in a jiffy. The government will bail us out which means we will not have be accountable for our decisions and planning (or lack there of.)

Most of the people in this country cannot economically see past their noses and will jump on the nearest bandwagon that advertises prosperity. Who knows how the next 1 to 8 years will play out? But I do know we will keep "kicking the can down the road" unless our education system starts teaching a balanced view of economics and financial responsibility. The lack of economic and related scientific awareness, particularly in the 15-45 year old age groups, is appalling---and that will set our course long-term.

The media and government keep talking about our Saviors. But we should focus on is saving ourselves and stop looking for Sugar Daddys to cover for our ignorance and poor choices.

2008 Dec 30 11:45 AM

[Timmothy Posey:]

Very good article, however the only problem is that in our 21st century banking system (PayPal, high-yield online savings accounts, fractional reserves) the more that we save, the more banks will be flush with deposits. What do they do with this? They turn right around and force it back down on people, with easy money loans, 0% financing, and "No Interest, No Payment until 2020" furniture sales.

There is no longer any sort of safe spread to make money on. Treasuries are at 0% effectively, so once this cash comes back off the sidelines, it will either have to go back into equities (too risky for many banks) or consumer loans (and we saw where that got us). It is a vicious cycle, and just like the article said, it is a symbiotic relationship. We need easy money, as much as easy money needs consumers.

Lastly, I'd like to point out that interest rates were much higher back then than it is now. Granted, consumerism and materialism wasn't like it is now, however putting your money in a 30-yr Treasury @ 9% back in 1990 was probably a good idea, as you'd only get 2% for it now. Does anyone else notice a correlation as those yields came down, our savings rates dropped?

2008 Dec 30 12:36 PM

[johnbee:]

probably the main reason Japanese investors stopped saving is that they get no interest on their money. won't that be the same in the US and elsewhere soon, especially if people fear inflation and spend money before it drops in purchasing power. However if we get deflation then those who have got money will be able to but things cheaper even though interest rates may be zero. Its all about timing.

2008 Dec 30 12:43 PM

[danmcl:]

An entire article on low savings rates and not one mention of artificially low interest rates. Amazing!

Don't you think that interest rates that are artificially held significantly below market rates might have just a teensy weensy effect on how much people spend? In the 1990's, people were saying why save to earn a few measely percent when I can get into the stock market and earn 30%. Talk about a bubble.

Why shouldn't anyone want to buy a big home when interest rates are so low? You can't make any money in a savings account so, since real estate always goes up, why not jump into the bubble head first?

The article discusses Japan and still doesn't make the connection. The Japanese Government has been pursuing a low or 0% interest policy since the early 1990's. Is anyone surprised that the Japanese people are not really that interested in saving money to get nothing in return?

It is beyond me how any serious discussion can take place about the rate of saving and totally ignore one of the primary inducements to save.

2008 Dec 30 01:13 PM

[Jack Walker:]

Thanks for this very interesting article.

While there are many factors that have contributed to the current state of affairs one of the most significant as you have appropriately identified is the inability of median family income to keep up with rising costs. Many people used the “House ATM” financial planning strategy since it was the only available means to bridge the gap. Those claiming that stability in housing market is the answer to the nation’s economic problem are missing the basic fundamental cause.

We should all be dismayed by the lack of attention being given to the real problem.

Is it inevitable for rising median family income in the developing world to be accompanied by stagnant or declining median family income in the US? Is it a zero sum game and is International Economic Trade Theory all wrong? If so, will the US be forced into trade protectionism?

Interestingly, while Germany and France have single payer health care systems they seemed to have maintained higher savings rates however, Japan, Canada and the UK with similar health care systems followed the US with declining savings rates. What are the determining variables accounting for this disparity? Are they political, social, economic or some combination all them all?

2008 Dec 30 02:17 PM

[Indexor:]

Excellent article. Interesting comments as well.

I believe the resulting impact on the investment markets around the world will be continuous contraction for the next 10-15 years. In the US, as Obamanomics and the liberal congress double the size and scope of the government, spending borrowed dollars from foreign governments, stimulating the "middle class" with welfare checks while overregulating and overtaxing succesful entrepreneurs, creative risk takers and "the evil corporations with their private jets," both business and stock markets are likely to languish for decades.

As the pendulum swings left toward an entitlement mentality, I believe investment returns will be marginalized under Obama's class warfare and collectivist agendas. His policies will likely be tolerated for a term or two (4-8 years) but our standard of living will quickly deteriorate. A return to capitalism, freedom from unnecessary government intervention and rewards for succesful individual risk taking are unlikely to find traction again for another 8-12 years. Yet, even as a new cycle begins, it will require a whole new generation of investors (being born at the moment) and possibly another 25 years before the next bull market returns.

2008 Dec 30 02:26 PM

[John Lounsbury:]

Several commenters mentioned the disincentive to save connection with very low interest rates, but Danmci said it best. A fat panda added the aging demographic connection to lower savings rate. So far we have two examples: Japan and the U.S., where this potent combination has brought down double digit savings rate to near zero. In my opinion, these two factors have dominated the trend.

Trader Mark - - -

In spite of my simpified statement of the problem, your article is excellent. You bring in other factor that affect reduced savings, such as concentration of wealth in fewer hands (the growth of the "working poor class" and the flattening of median income growth coincident with income growth at the top).

I still think the demographic and low interest rates are the dominant factors, but there are other factors you mention, including the two wealth distribution affects.

Finally, population psychology has an important impact. The generation reaching maturity in the 1990's was three generations removed from the adults of the Great Depression. The lessons of that earlier time were almost totally absent from from the psyche of the generation three steps removed from the experience.

2008 Dec 30 02:36 PM

[henarl:]

We will keep kicking the can down (up) the road until the road becomes too damn steep. Then the can will roll back down to the bottom, crushing a lot of us on it's way.

2008 Dec 30 02:44 PM

[carey_jim:]

If you look at the revolutions of the past, and I'm not only talking about violent overthrows of former governments, but of those revolutions which were accomplished without war and bloodshed such as the English revolution of the early 19th century when the King and the House of Lords were divested of most of their authority, what you find is very great social inequality and almost complete separation of various classes.

To take only one example, the Russian Revolution of 1917, there was a large mass of former serfs (liberated from slavery only in 1864) who were completely separate from the ruling aristocracy (who often spoke French in preference to Russian) and who were, quite literally, the masters of these former serfs who functioned as servants for them.

Also, there was an external shock, World War I, which was necessary to topple this unstable social arrangement.

Americans feel equal to each other, and the majority, including at least the top 75% of the population, drive cars, have refrigerators, have televisions and various other electronic gadgets and can even use the Internet, even if they have to do it in a library.

Economic equality has never become a revolution making issue in America and it probably never will be. (And I'm not talking about violent revolution but political revolution.) The history of the 1930s in America shows us that.

It's arguable that we are now facing a similar set of economic problems as we were in the 1930s.

Much of what happened in the 1930s was a result of changes in technology: Women were joining the work force because families were becoming very small, working hours were shortened because of increased mechanization and electrification of the workplace, farm labor was being replaced by mechanization, etc.

Today, telecommuting and working at home is replacing commuting and business travel, the Internet is replacing books, magazines, newspapers and snail mail, and even more important, is replacing brick and mortar shopping. Home entertainment is replacing public entertainment, etc., etc.

This economic revolution comparable to that of the1930s, and I think will have similar social dislocations, possibly including a deflationary slowing down of the economy.

Also, the only thing that really distinguishes the very rich from the rest of America is the safety net their money gives them (medical, etc,) along with the ability to travel in great comfort, all over the world, and the ability to have excellent educations and training. These are not small things, of course.

So if there is a social revolution here, it will take place in education, social safety nets (and, possibly, more opportunity to travel :)

As for Japan, I wouldn't make too many comparisons between them and us. I asked a Japanese colleague, once, why the Japanese didn't buy American cars and he told me, for one thing, it would be an insult to his boss. When I asked why, he said that he would have to park it in the same parking lot as his boss and his boss would see it. I didn't understand. He said that he couldn't even drive a more expensive car than his boss and driving an American car would be an even greater insult for which he would be required to pay a very steep price.

Japan is apples and America is oranges.

2008 Dec 30 03:04 PM

[Chris B:]

GDP = consumption + investment + government spending + net exports

Consumption is 70% of GDP, so a shift from a 0% to a 10% savings rate would in itself result in a 7% reduction in GDP. Of course, GDP also counts investment and government spending which could offset some of this decline if they increase as a result of the savings and government stimulus spending. A reduction in the trade deficit seems likely, as much of the savings would come from people not buying imported junk and electronics they don't really need, and this will also have an increasing effect on GDP by reducing the negative number currently in place for net exports.

Yet, this change in GDP composition certainly won't be a wash. That 10% in consumer spending was somebody's salary. Millions of people with jobs dependent on non-essential, luxury, or marginally useful products and services will lose their jobs. WalMart failed in Germany for a reason. People there don't just buy marginally useful junk on a whim, and the US is slowly moving towards that traditional mentality. These workers will have to make a difficult transition to more productive employment and they also won't be spending while they are unemployed or retraining.

Hopefully, in the end, the resulting reduction in GDP will not mean a reduction in our quality of life (after all, GDP is just an economic statistic, not a total measure of quality of life). A good, arguably better, life can still be lived with less junk, smaller houses and cars, and fewer $6 lattes. It's certainly more economically sustainable. The question is, how can we revive the "production" industries in time to absorb the unemployment that will come from the industries that consumers cut back on in order to save? A reversion to the economic composition and money mentality of the 60's and 70's might also be ahead, and it doesn't look good for the people who provide pet massages or mix organic smoothies for a living.

2008 Dec 30 04:43 PM

[jayvee:]

excellent article. One point you mention however -- "since many on the globe live in stark poverty, much of it based on nothing more than what mother they are born to, and in what country" -- it's not only that. Perhaps taking a tip from china and limiting the amount of reproduction could help. When you can barely feed yourself, should you really be giving birth to you 14th child?

2008 Dec 30 07:18 PM

[secmaven:]

The "zero" savings rate is not accurate. Savings as reported by the US government has never included 401K contributions, which for many individuals, is their largest form of deferred consumption, ie. savings.

2008 Dec 30 10:20 PM

[Jan Baker:]

I want to add my vote to the throngs calling this an excellent article. If I had to put it into one sentence for the ADD world, it's that the author is using indicators that sound a whole lot more authentic than those being thrown around by said pundits: actual wages, actual savings rates, actual differences between economies vis a vis savings, and most of all, the author mentions that the continual lowering of interest rates contradicts the most fundamental of economic realities: save! (I love it when a CNN rant practically scaring people into new orgies of buying lest the economy sink even further is followed by one of those feed-the-pig ads; it's no wonder people pick up guns and start shooting the world after being goaded by total contradiction twenty four hours a day!)

But listen: know why nobody is screaming Marxism or socialism at the blatant promotion of the European model? Because it isn't socialism at all, even though we call it so. The word has been warped, is all. The socialism positively presented in this post is the same one promoted by Pius XI in his Quadragesimo Anno, and is actually a self-conscious capitalism protecting itself from its excesses of ownership. Private property and all the rights thereunto are protected, but the exercise of that property may be judiciously manipulated by the goverment.

There is a price that is not mentioned in this post, however. There is the absolute need for social virtue. One hardly knows what else to call it It is a very serious tax, and it tangentally addresses demographics, another factor noted by many comments here. Pius XI spoke of it in Quadragesimo Anno. I l can't possibly sum it up, but perhaps I might be permitted to say that it boils down to a society that recognizes God, recognizes justice, and protects another fundamental building block of both social and economic growth: the human family--the real, procreative human family, not the sham conterfeits. Or to add one more caveat that might somehow be collapsed into the first, if only I knew how to say it: the protection of human life, absolutely including the life of the unborn, put on a par with the protection of private property.

These latter points are economic realities, too, and we're just futxing around until we recognize it. (Here's the damn point: we can't afford gay or even unprocreative heterosexual, Playboy sex any more._

2008 Dec 31 10:57 AM

[Jan Baker:]

I have just read a comment that directly contradicts my assertion that positive global population growth (including the middle classes, those which are not reproducing now, even in "developing countries"), and I would like to petition the author of this excellent post to address this single element in a follow-up, using the same common sense indicators he has used here. Are we better served by further reducing our populations, or is the over-all survival rate of the global population better served by class-free increase?

On my blog, I have a piece that argues for the latter, for population increase in developed as well as developing countries, but only if we begin to implement a very aggressive space-bound program.

2008 Dec 31 11:03 AM

[win:]

Trader Mark,
This is well thought out and carefully written. Thank you for sharing.

2008 Dec 31 02:13 PM

[TraderMark:]

First, thanks for all the excellent comments - nice to see discussion where people don't just attack each other. Someone made some great points about interest rates in Japan and the U.S. - essentially the central banks in both countries have "attacked" savers. I feel awful for the people who want a conservative CD in retirement and are being forced out on the risk curve by the Fed (both Greenspan and now Bernanke) - I did not take that into account but I think its a supporting issue - not a direct issue.

If you are a saver by nature you will save at 0% rate - you are conservative and long term thinking in nature. Hence while a 8% rate is more appealing on the margin, a saver is a saver - at any rate. Ask the few of those around from the Great Depression.

Anyone who says the saving rate is not accurate and you need to use capital gains, I first ask (what capital gains?) over the past decade - the S&P is down. Second, I ask - as long as that has been a consistent issue - then the data set is consistent i.e. if one variable has been missing since the 1960s than its been missing from all data. The trend is the same. You can quibble with the rate but the directional is not to be argued with. It's down by a staggering amount versus previous decades. Perhaps the 1960s were truly 12-14% savings rate instead of 7.5% to 10%. I'd also take question to someone who believes there is a huge influx of 401k savings out there... the median 401k balance for those in their 60s won't last them 1 year of retirement. And forget about 90% of people in their 20s, 30s and 80% in their 40s or 50s... 401k balances are top heavy where a few save a ton and most save very little.

Demographically I'm a Malthusian - we are going to put a lot of stress on this Earth as too many humans are competing for too few resources. But that's an emergency for the next decade. I am hoping a lot of technological innovation comes to fruition in the next 5-20 years since we will need it. We are headed to a 9 B headcount for the globe by mid century. If even 10% of those people strive for middle class lifestyle we're in trouble. We've been able to live good lives since so many in the globe are in stark poverty and self reliant, hence not competing with us for said resources. That will also be changing as the next century will be the rise of Asia.

Again, thanks for the excellent comments if you agree or not. Gives me hope for Americans ;) At least some of them.

2008 Dec 31 04:09 PM

[Chicago Rick:]

This is a pretty late comment but I wanted to compliment the author on the presentation of facts and opinions with political agnosticism. It gets very tiring reading politicized rhetoric under the guise of observations on the economy. Very intelligent, well presented and spot on writing!

Jul 07 12:06 AM

[Crocodilian:]

A thoughtful article, with good data and something rarely found on SA, intellectual modesty. Would be good for others to learn from author and say "I don't know" more often . . .

As to author's points, one compelling one has to be retail space. There's a good argument that a good part of it is obsolete; a friend of mine who works at Amazon refers to malls as "Amazon's showrooms".

When you think about it, the entire retail experience infrastructure came into existence before online shopping; some retailers have a distinctive niche (the very expensive, the very cheap)-- but the vast middle has a problem. That said, a shrinking sector can actually add to the profitability of the survivors-- Best Buy certainly has benefited from Circuit City's liquidation.

But here's a point which I haven't seen mentioned: a huge amount of discretionary consumer spending -- the part now being channeled into savings-- was spent on imports.

If an American consumer chooses to put $1500 into the bank, instead of buying a television made in China, or clothing made in Thailand, the loss to the US economy is the profit made by the US retailer-- but much of the value-add was always overseas.

Savings which result in decreased demand for imports have a lot of effects. One notable one would be a stronger dollar . . .

Aug 08 08:05 PM