Is Saving the Root of All Evil? 20 comments
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Here’s some good news for a change. Americans’ personal savings increased from 3.9% in December to 5% in January.
From the BEA:
Personal saving — DPI less personal outlays — was $545.5 billion in January, compared with $416.8 billion in December. Personal saving as a percentage of disposable personal income was 5.0 percent in January, compared with 3.9 percent in December.
The fact that we’re rediscovering a virtue that our parents (or grandparents, for my younger readers) tried to instill in us is refreshing. There are some, however, who see a dark side to this development. Paul Krugman in the NYT today decries savings as the root cause of all the evils that have been visited on us.
And the saving glut is still out there. In fact, it’s bigger than ever, now that suddenly impoverished consumers have rediscovered the virtues of thrift and the worldwide property boom, which provided an outlet for all those excess savings, has turned into a worldwide bust.
One way to look at the international situation right now is that we’re suffering from a global paradox of thrift: around the world, desired saving exceeds the amount businesses are willing to invest. And the result is a global slump that leaves everyone worse off.
So does anybody know what might be the right thing to do: Spend like there’s no tomorrow, or sock that money away?
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Neither. Simply live within your means and pay yourself first. All of this excess savings could mean there is consumer spending firepower waiting to be unleased or cash on the sidelines to be put back to work.
If people just pushed their savings into stocks and bonds the market would soar and consumer confidence would change rapidly.
The spending is not "trillions more" than people are saving. It's roughly the same amount. You are failing to see that the money being spent is the same money (savings) that people are pouring into US Treasuries for a safe haven. It doesn't come out of thin air, despite the popular belief around here.
The only macro-level cure I see is to wait it out until enough debt is paid down that the "herd" starts to accumulate it again.
Read Peter Schiff's article from this morning ("Obama Placing the Economic Cart Before the Horse") to get a great perspective on savings as they relate to debt and the real economy (the one now hidden beneath overzealous government and the publics' financial ignorance).
Right for me, my family, or my kids, or right for the establishment, who is supposed to represent the "common good"?
See, I have a moral dilemma here.
That's why it's called the "Paradox" of Thrift...
However doing what it right for you and your kids at this very moment in time may not look so good in retrospect if the economy keeps crashing all the way back to the 19th century.
On Mar 02 01:25 PM APM wrote:
> "So does anybody know what might be the right thing to do: Spend
> like there’s no tomorrow, or sock that money away?"
>
> Right for me, my family, or my kids, or right for the establishment,
> who is supposed to represent the "common good"?
>
> See, I have a moral dilemma here.
On Mar 02 01:35 PM DW wrote:
> Wow, Krugman is arguing against saving? Why is this even a debate?
On Mar 02 01:25 PM APM wrote:
> "So does anybody know what might be the right thing to do: Spend
> like there’s no tomorrow, or sock that money away?"
>
> Right for me, my family, or my kids, or right for the establishment,
> who is supposed to represent the "common good"?
>
> See, I have a moral dilemma here.
If the real-estate market could stabilize in near term because it's indicators reached some preview lows, that's not what I could say about rate of savings that just started to grow recently and it's not even close to historical averages...
I've looked recently at some indicators of debt and savings and from the evolution could take years to get there...
The rate of debt it's just falling of a cliff and it reminds me of stock plunge.
If it's not going to stabilize, consumer spending won't return to grow either and in this case there's no way GDP will have a steady grow.
America has enjoyed prosperous times during which the rate was much higher than prevailed from the mid-1990's until the collapse, so a low or negative savings rate clearly is not a prerequisite to economic growth. What is more important for sustainable growth is that people live within their means while at the same time, retaining optimism about the future. These conditions must be present. And who knows, by doing so and with enough time, we may even begin to reverse the current account deficit and underpin the dollar with sustainable strength.
The reduction in the savings rate into negative territory in 2005 for the first time since the Great Depression should have signaled a harbinger of things to come for us all. Instead, we appear to have been collectively seduced by the Fed's apparent ability to indefinitely create soft-landings as well as the ostensible economic stability brought about by financially engineered risk dispersement instruments ("put the risk in the hands of those who can best manage it, thus increasing efficiency" was the mantra of the day). As these twin mirages have collapsed, we have no choice but to change our ways.
Amen brotha!
On Mar 02 01:01 PM timwalsh300 wrote:
> Steve,
>
> The spending is not "trillions more" than people are saving. It's
> roughly the same amount. You are failing to see that the money being
> spent is the same money (savings) that people are pouring into US
> Treasuries for a safe haven. It doesn't come out of thin air, despite
> the popular belief around here.
On Mar 02 12:45 PM Steve in Greensboro wrote:
> Don't worry, Mr. Lindmark. Whatever individual taxpayers are saving,
> Obama and the Democrats are spending and trillions more.
That looks like savings in the statistics because those dollars don't re-enter the consumption side of spending--yet the deleveraging process will eventually lead to healthier personal balance sheets-- a 'very good thing,' as Martha Stewart would say.
And perhaps, the American public will finally feel more free of an overburden of debt, and then become more comfortable with entering the consumption cycle again.
But until the deleveraging process has run further (possibly until year end), consumption will still lag, and 'savings' will continue to rise.
So, if I were investing, I'd go long on low-end retailers, hedged by shorts on higher end department and specialty stores. (That doesn't help my employment because I work for BBY, but reality is reality.)