Some things still need 'splainin
[Update. In my rush to get this done, I neglected to include the article's thesis. I have added the first quote below, before dealing with some atrocious problems with organization.]
A couple weeks ago I tried, with a striking lack of success, to come to terms with The Savings Rate, and particularly the frightening lack thereof.
Last week's Economist included this article, The end of the affair.
Strip from the rest of the article an unnecessary re-proving that anecdote-is-not-data, 24 some-odd column inches boils down to this:
So, riddle me this: how can debt increase in the face of a positive savings rate, no matter its actual value?
A couple weeks ago I tried, with a striking lack of success, to come to terms with The Savings Rate, and particularly the frightening lack thereof.
Last week's Economist included this article, The end of the affair.
An important reason why the American economy has been so resilient and recessions so mild since 1982 is the energy of consumers. Their spending has been remarkably stable, not only because drops in employment and income have been less severe than of old, but also because they have been willing and able to borrow. The long rise in asset prices—first of stocks, then of houses—raised consumers’ net worth and made saving seem less necessary. And borrowing became easier, thanks to financial innovation and lenders’ relaxed underwriting, which was itself based on the supposedly reliable collateral of ever-more-valuable houses. On average, consumers from 1950 to 1985 saved 9% of their disposable income. That saving rate then steadily declined, to around zero earlier this year (see chart). At the same time, consumer and mortgage debts rose to 127% of disposable income, from 77% in 1990.
Strip from the rest of the article an unnecessary re-proving that anecdote-is-not-data, 24 some-odd column inches boils down to this:
The risk is that the recession will be longer and the recovery weaker than expected as consumers retrench.Okay, fine. As far as it goes. However, something needs 'splainin. Except for a vanishingly small period in 2005, the US savings rate has always been positive.
So, riddle me this: how can debt increase in the face of a positive savings rate, no matter its actual value?
posted by Hey Skipper at 10:47 PM
23 Comments:
Beats me, although as a practical, household matter, I feel more comfortable if I have some money in my savings account, to withdraw in an emergency, even if my debts are higher, than I do when my debts are lower but I have no reserves to call on overnight.
In terms of national account, not the same. But remember -- Reaganomics counts debt as savings. So there's part of your answer.
I am amused by the short half-lives of market indicators. How long since you saw a report that mentioned a triple witching-hour? And where did those frequent updates about M1 v. M2 go?
Weren't those important? If they were, why aren't they important now?
Cool pictures!
Part of it is that if one lies, or is lied to, about the value of one's savings, one can spend it at the same time. In England we call this "all fur coat and no knickers". The horrible truth is that a great deal of wealth (represented by bits of paper previously thought to have a value) is fit only for lighting the stove. The value has been stripped out of lots of investment instruments by profit-taking. Eg the so-called securitisation of forward profit streams. The value has gone.
In a parallel way, there is a picture of a 1930s German housewife lighting her wood-burner using bundles of currency because the currency was of less value than the kindling she couldn't buy with it. It's a sobering thought. I hope it doesn't get cold this winter in err, Iceland.
Harder currency is what we need and a fiscal stimulus aimed at creating future wealth not future spending.
Harry:
... I feel more comfortable if I have some money in my savings account, to withdraw in an emergency, even if my debts are higher, than I do when my debts are lower but I have no reserves to call on overnight.
As do I. However, your comment highlights a conceptual issue that neither The Economist, nor you, have come to grips with.
No matter what level of bank savings you think appropriate, at some point, presuming a not particularly high savings rate, you will reach it.
Then what?
Bank savings are very liquid, which is nice. However, they amount to an opportunity for someone else to make a lot more on your money than you are.
Therefore, once some level of liquidity is assured, it makes no sense to reinforce it. Consequently, I'll bet a great many Americans chose to put disposable income into stocks, precisely because of their returns over the long haul. The article notes the rise in stock prices on the one hand, but leaves the other hand firmly in pocket: people bought stocks. Which, so far as I can tell, does not count as saving, even though it is not consumption of any kind.
Secondly, there seems to be some double counting here. Personal savings is disposable income exclusive of consumption and interest payments. Household debt is the sum of consumer credit and mortgage lending. In the charts, both are measured as a percentage of disposable income.
The savings side decreases by 8-ish percent (disregarding whether their notion of savings is particularly useful), while over the same period debt -- measured as a percentage of household income nearly doubles.
Repeated full disclosure: I may well be a 4x4 blockhead when it comes to finance. However, to this blockhead, those graphs cannot be true simultaneously.
Now, if I took them from Time magazine, which aims for a slightly lower intellectual bar than, say, Entertainment Weekly, that would be one thing.
But from the Economist?
In terms of national account, not the same. But remember -- Reaganomics counts debt as savings. So there's part of your answer.
They are not in terms of national account. So whether Reagonomics counts debt as savings (a phrase that is not gaining meaning from repetition, BTW), goes no ways towards an answer.
And where did those frequent updates about M1 v. M2 go?
I seem to remember an Economist article that said those measures were only useful in an economy that is largely cash based.
Which ours is not. I have no debt, but I pay for nothing in cash.
And, I'll bet that the credit card balances I do carry, despite paying them in full each month, are counted as debt.
Even though the money is sitting in the bank waiting for the bill due date.
Functionally, my economic behavior is no different than if I did pay cash for everything.
Not in terms of BEA metrics, though.
That needs 'splainin.
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Menelaus:
The horrible truth is that a great deal of wealth (represented by bits of paper previously thought to have a value) is fit only for lighting the stove.
I'm not quite sure what you mean here. If by that you are saying that certain types of wealth (i.e., purchased material assets or savings in any form) are worth less now than a year ago, fine.
The dollar value of my stock portfolio is down 30% from a year ago. However, it is still worth more than if I had shoved what I invested in stocks into a passbook account, instead.
Eg the so-called securitisation of forward profit streams. The value has gone.
This also perplexes me. Many of the securitized forward profit streams are residential mortgage payments that are, in fact, pure profit. As I noted in the previous post linked to in this one, the money that roughly 3/4 of homeowners pay for their homes does not count as consumption, even though the BEA treats it that way.
Why does it not count as consumption? Because the original cost of labor and materials for the house has already been covered. Further income on a residence after that buys nothing.
Harder currency is what we need and a fiscal stimulus aimed at creating future wealth not future spending.
I'm also not sure what you mean by "harder currency".
The dollar has gotten, within the terms I think you are using, significantly harder over the last couple months: for an American consumer, one dollar goes a lot further today than it did a few months ago.
That is called deflation. Now, for the moment most of that change is attributable to the asset bubble in petroleum (and other commodities) getting pricked.
Beyond that, though, be careful in asking for a harder currency.
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All of this is interesting.
But I still need someone to explain to me what constitutes saving and debt, and how the two can legitimately vary as The Economist reports they did.
Presuming, of course, their reporting is neither lazy, stupid, or professionally incompetent.
If that isn't saying the same thing three ways.
Skipper, I think you have done to savings calculations when Steve McIntyre has done to Mann's hockey stick.
Apart from managing a household, the only function of savings is to allow investment. So while the answer for your question about how much I ought to keep in my passbook account is sort of a matter of taste, it is obvious that whatever the level of savings is, it is more than adequate for anything anybody is willing to invest in.
It may not be adequate to do as much investment as people ought to do -- the amount of deferred maintenance in our economy must be in the tens of trillions -- but it has proven adequate and more than adequate for funding new, allegedly profit-generating ventures.
There is such as thing as too much saving. The idle funds go haring off after unworthy speculations, and you get . . . well, you get what we've got.
Hey Skipper,
I thought that buying stocks could be savings - sometimes anyway. Over here, we tend to buy stocks through pension funds and structured tax efficient "savings plans". ie It's long-term, locked away value. It's not liquid money for spending any longer.
If one buys an instrument in this way, then that is a saving, isn't it? OTOH if one splurges the housekeeping money on the junk bonds being hawked by a Croation hood on the corner of Threadneedle Street, that is speculative investment of the wildest kind. It's akin to playing the lottery or going to Vegas for the weekend. That isn't saving, that's gambling.
My point, ill-formed and amateurishly expressed as it is, is that the real core of value of what we have previously thought to be stored wealth sometimes now just isn't there any more. That isn't to say that the whole market hasn't dropped whatever the market has dropped but that whole rafts of that paper are all but worthless. They have dropped completely - to approaching nil. The rest of the market is still sound and healthy. Alas, we do not yet know which bits of paper are the worthless ones. Hence the collapse of several banks and their current unwillingness to lend so much as the price of a cup of coffee to anyone because that ten bob might never come back either. If RBS and Lehmans can fall, anyone can fall. If Citibank is cap in hand and creaking, nobody is trustworthy.
The visible link between value, price and risk has been lost. Say, I have pocket queens. There is a king on the table. I have a hundred pounds in and am being asked to pay another fifty by a grumpy monster in sunshades. I can do that sum and make my semi-rational decision because I can see the risk (partly), and I can see the price and the reward.
And vast amounts of peoples' savings have been traded away, slice by slice in the profits of ever more complex paper instruments - the risk hidden, compounded and aggregated, the reward taken. Maybe they were daft to let this happen - and the funds did it to them unseen for the most part - but that is partly why we are where we are. Buffet says "look for long-term sound businesses". Quite.
Stocks down 30%? Try, Sterling down 25% and then the sterling measured FTSE down almost 40% more. Read 'em and weep.
My point about hard money was that I think that value (wealth) flees in a panic and does great harm when it does. Part of that flight is between currencies. It cannot be true that a pound's dollar worth is a quarter less than it was in the summer. One of those two - or both - must be a construction. (And they both are, I know.) We need to be able to preserve the relative values of paper currencies if modern markets are to have any sort of stability when troubles arise. Fixed exchange rates anyone? But that is another argument for another thread, I digress too far and I apologise for that.
Wow, must do some work...
Harry:
So while the answer for your question about how much I ought to keep in my passbook account is sort of a matter of taste, it is obvious that whatever the level of savings is, it is more than adequate for anything anybody is willing to invest in.
Actually, my question isn't what the right amount is to keep in a passbook account. Rather, I am making an assertion that the number, whatever it may be, is finite, and any reasonable amount is attainable with a moderate savings rate: to attain savings equal to 50% of annual income would require an 8% savings rate for six years, after which a savings rate of 1% would be sufficient to keep a savings in pace with an annual 5% growth in income.
Rather, this relates to my the previous question -- just what the heck do "experts" mean when they start talking about savings rate.
I am taking it one step further in questioning whether those who really should be experts -- they write for The Economist, after all -- are writing articles that are even internally coherent, no matter what the answer to the first question is.
My default argument here is that I'm the one missing the glaringly obvious; however, despite no small amount of time chasing what should be a relatively simple subject, I cannot find what it is I am missing.
There is such as thing as too much saving. The idle funds go haring off after unworthy speculations, and you get . . . well, you get what we've got.
Clearly, there is such a thing. And, depending upon how the BEA savings rate is really calclulated -- that is, if it excludes 401(k) and IRA contributions -- then the aggregate savings rate for a static population (birth rates matching death rates) should be about zero. Our population is aging, so one shouldn't be surprised if it is actually becomes negative.
I don't savings is what is causing our current schlamozzle, though. I place the blame on the CRA for destroying lending standards, and the Chinese for refusing to float the RMB.
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Menelaus:
I thought that buying stocks could be savings - sometimes anyway.
Near as I can tell (see the link immediately above) even though you would think purchasing stock should be savings, the US savings rate does not appear to treat it that way.
Odd, I know, if actually true. It is certainly true that the savings rate does not include capital gains from stocks as income, even though the tax code is very emphatic to the contrary.
It's long-term, locked away value. It's not liquid money for spending any longer....
That is true. It is also true that buying stock from a Croatian hood is probably not the best way to save, and it may very well be akin to gambling.
Equally, your point about stored wealth is well taken, particularly if one has been unfortunate enough to have purchased a lot of Enron stock as practice for dropping all one's spare dimes into Lehman shares.
However, returning to my original question, the BEA defines savings as the difference between income, and the sum expenditures on goods and services. Buying stock apparently counts as an expenditure, and capital gains do not count as income.
Stocks down 30%? Try, Sterling down 25% and then the sterling measured FTSE down almost 40% more. Read 'em and weep ...
Interestingly, the pound is back to where it seems most comfortable with the dollar. I have spent a lot of time living in England, and seen it range from $1.05 to $1.95. However, for the vast majority of the last twenty years that I have been paying attention, it has always been within spitting distance of $1.50.
As I noted above, a particular fixed exchange rate is a good part of the problem. I don't think we need any more.
How can there be a rational discussion on an issue until everyone agrees on the definition of terms.
Skipper says, his credit card charges which he pays off at the end of each month (as do we) are counted as debt by financial geniuses, when it's obviously savings.
We have savings earmarked to pay for the accumulated purchases on our credit card, so how is that different from the old, pre-credit card days (yes, I remember them) when we had savings earmarked to pay for individual purchases. It's unlikely even an ivy league economist would count those savings as debt!
Apparently financial analysts haven't caught on to the changing scene yet.
You've convinced me that 'savings rate' is an empty term. Of course, Paul Craig Roberts had convinced me of that, on different terms, over 20 years ago.
Savings is what you can consume if you no longer have new consumables coming in. The German middle class learned in 1924 and the Russian middle and lower class in the late '90s that money and its proxies are not really savings if the government decides they're not.
Why would a government do that? Because it has big debts.
Hmmm.
The Mormons who have 6 months of granola stored away have savings. The rest of us, just bets of greater or lesser probability of paying off.
The answer to your specific question is "it can if you have two different definitions of income, one from the Federal Reserve and the other from BEA, which uses the National Income and Product Accounts.
"
David:
Well, that was helpful.
In a Delphic kind of way.
That just restates the original question, from "what do they mean by savings?" to "what do they mean by income?"
Since discussing one inextricably links to the other your answer doesn't seem to advance the state of play very much.
erp has added another inextricable element to the question: how does the BEA treat credit card balances?
It appears to me as if credit card transactions are treated differently than cash transactions. However, if true, that merely confuses means with ends.
Once upon a longish time ago, most of my transactions were either by cash or check.
More recently, virtually all my purchases were conducted via credit card. I used the checking account to fund daily operations, with look ahead. That is, I would make purchases for which I did not yet have the money (excluding rainy-day savings), but would have by the time the bill showed up. The monthly bill was about 7% of annual after tax income; however, because of billing and payment cycles, I had a running balance of about 7% of income.
How does that work with debt and savings?
Even more recently, I shifted to an exact analog of a longish time ago. I make no purchase unless the money for it is already in the daily operations account, and (thanks to electronic banking) pay all credit card bills to zero twice per month.
How does that work with debt and savings?
Each of the three options are functionally identical -- not a dime of finance charges among them. The second option, for a prudent person, would increase the rainy-day savings account by a month's worth of credit card purchases over what it would be otherwise.
In terms of savings rate though, that is negligible.
My guess is that when stats get shoved in front of us showing the amount of credit card debt, the stats folks are mistaking means for ends, thereby significantly overstating the actual debt.
Which serves to aggravate the apparent problem that those who should know what they are talking about(why else, after all, do I shovel out $95-ish per year for The Economist), don't.
Naturally, my CPA husband went berserk when he read my last comment. If credit card charges are considered debt, why aren't the stack of bills we used to have on our desks considered debt for statistical purposes?
Why can't he and men in general understand that if you charge things, you don't take your money out of your cache until the end of the billing period, so that money is saved..
Anyway I held my own and he was left holding his head and mumbling about debits, credits and investments ...
Building on skipper's statement about paying his credit card twice a month, my guy puts almost everything on a credit card (even groceries) that gives cash rewards. It's not much, but it is more than zero, so why not. Everything else is paid electronically. No stamps, no envelopes and best of all, no bills in the snail mail.
Credit cards also do your bookkeeping for you. You can download your transactions into an Excel or Quicken file and do your sorting for income tax purposes and budgeting ... so again why not use a free service that used to take hours of plowing through the check book.
Actually, I think I've figured this out. Both charts can be right if they make the common mistake of confusing "Disposable Income" with "Discretionary Income." "Disposable Income" is Income less taxes. "Discretionary Income" is Disposable Income less "necessities," which includes your mortgage.
So, say you make $100,000. You pay $40,000 in taxes, $20,000 on your $250,000 mortgage and $10,000 for your other necessities. You spend $25,000 on non-necessities and bank $5000. Your debt is better than eight times your Discretionary Income while your savings rate is 16.7% of your Discretionary Income. The next year, you move into a new house, get a new $300,000 mortgage and, voila, your debt has increased to 11 times your Discretionary Income and, everything else equal, your savings ($2500, after you pay on the larger mortgage) has decreased to 9% of your Discretionary Income.
David:
Interesting.
Let me see if I have this right.
In your example, Disposable Income is $60,000 ($100 - $40), and Discretionary Income is $30 ($60 - $20 - $10).
Which, as you say, makes $250 of debt 8.3 times discretionary income, and savings of 16.7%, decreasing to 9% with the more expensive house.
So far, so good.
However, I have several questions.
First, there seems to be some double counting going on. Discretionary income goes down because of the more expensive mortgage. Yet there is no offset on the positive side of the ledger -- the homeowner is purchasing a more valuable asset with the higher mortgage. Contrast with a renter who moves from an apartment with $20,000 per year rent to another at $22,500. The income - expenditure numbers are precisely the same, and the renter has much less debt. That makes sense so far as it goes; however, it doesn't make any headway towards The Economist's thesis that Americans will have to retrench. The homeowner's cash flow picture is exactly the same as the renter's, yet The Economist somehow would nod far more approvingly upon a nation of renters.
Second, debt doesn't seem to mean much without including the value of assets. At the moment, my total debt is 150% of gross annual income -- all of it in the mortgage. However, if I was to sell my house, my debt would overnight become -100% of my gross annual income.
Third, granting your contention that The Economist can't tell soup from nuts when it comes to using the proper income definition, the fine print on the right hand chart says "Includes consumer credit and mortgage lending". So, they really can't be talking about discretionary income alone, because consumer credit itself consists of both necessities and luxuries. (I'll ignore for the moment how much the term "consumer credit" is functionally different than cash, as noted above in this thread.)
Finally, the "household debt as % of disposable income" is mystifying -- for one thing, the omit time. Is that monthly income, or annual? It is noteworthy that the apparent slope (which amounts to rate of change) of the household debt line becomes much steeper around 2000. That seems to testify, in part, to your description of how The Economist is using numbers, since it sort of tracks the housing asset bubble.
Your explanation helps untangle some of what is going on here, particularly in showing how debt can increase while savings are still positive.
Unfortunately, that still leaves my original charge intact: The Economist, should know better than to be so definitionally inept. And that is even before getting to such things as whether their notion of consumer debt has any meaning at all.
The cited article is pretty representative of all reporting on this subject. I'd rather discover I am completely confused on the subject than discover all reporting on it is inept where it isn't dishonest.
Anytime anyone compares debt to income they're doing an apples to oranges comparison, including national debt as a percentage of GDP.
Hmm?
Will debt/savings become the new theme de blog for PJA?
David:
There you go with the Oracle of Delphi thing, again.
Saying something is "an apples to oranges comparison" is simply a colorful way to say that one has no relationship to the other, so no meaningful connection can be made.
I don't think that is true with debt and income, though.
Thanks to Peter's examples, I hate arguing from analogy. However, I think there is an appropriate analogy to be had.
Power and weight bear the same relationship to each other as income and debt.
In the realms where power and weight are important, it is perfectly valid, and often imperative, to take both into account: performance is impossible to predict, otherwise.
So, in guesstimating future economic performance -- which is, after all, just what The Economist was doing in the article -- the aggregate relationship between income and debt (which includes savings, since they are cached income), seems pretty darn important to my untutored eye.
To generalize from the particular: I am at some risk of getting laid off. However, because my fixed outgoing cash flow (mortgage payment plus necessities) is significantly less than current income, I can simultaneously increase savings for the contingency without cutting current spending.
If the American aggregate household looks a lot like mine, then the response to an economic downturn is going to look a lot different than if the aggregate household's fixed outgoing cash flow is much closer to income.
Of course, if the aggregate household looked like mine, then the economy would be in the perma-tank because of excessive saving: preparing for a rainy day earthquake in the midst of a global warming induced fire and flood.
It also seems completely valid to consider national debt as a percentage of GDP. Sixty-six percent for the US doesn't seem out of line, but I think a rational counter-cyclical policy would aim to pay down the national debt to the point where it is about 20-ish percent of GDP (a negative debt would be ruinous over anything but the short term), so that there is plenty of room for increased gov't spending to ameliorate a downturn.
IIRC, Juan Peron put debt:GDP on disregard.
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erp:
Will debt/savings become the new theme de blog for PJA?
Probably, until one of two things happens. Either someone comes to my intellectual rescue and explains how to understand savings and debt in the way The Economist does.
Or, alternatively, explain in which respects the MSM is mis-reporting the issue. Making dark predictions based upon a notion of savings no closer to economic reality than phlogiston is to physical reality should warrant a malpractice suit.
"Or, alternatively ..."
Boy, is that ever a crime against English.
Skipper, careful what you wish for. My husband has been explaining it ever since I showed him my "treatise" on saving and debt and it makes no more sense to me than it did when he started.
In fact, I may have turned him around. When we were walking into a store the other day, he took my arm and said, "Let's go save some money!" Of course, it might have been sarcasm.
Don't look for truth in the msm. The economy has to get a lot worse in order for Obama to sell people on the draconian changes he's got in the works to "save" us. I pray your job doesn't fall victim to it.
Don't look for truth in the msm.
I don't think it is a matter of "truth", as in consciously recasting objective reality to favor one narrative at the expense of the other.
The Economist -- a largely libertarian periodical -- has been beating the cr*p out of this drum for years.
Rather, I (provisionally) pin the cause on several donkeys:
-- what seems should be a simple concept is, in fact, not.
-- an apparent preconception of what the savings rate should be, without considering what people save for.
-- longstanding intellectual laziness borne of assuming possession of far more knowledge about the concepts under discussion that is actually the case.
If your husband has some insight into all this, use whatever means are at your disposal to encourage, or force, if that is required, him to divulge.
Apples and oranges are both fruits.
If the question is whether the debt service is too high, then we can compare it to income. If the question is whether we owe too much, we can compare debt to our net assets. But comparing an income number to an asset number just doesn't tell us much.
If it did tell us much, it would tell us that, since 1940, the national debt hasn't been lower than 33% of gdp if you count debt the government owes itself or 25% of gdp if, like me, you don't. If you don't count publicly held debt -- that is, you don't believe that taking money out of one pocket and putting in another is a meaningful financial transaction -- then our national debt is currently running under 40% of gdp. That is, we "owe" 40% of our yearly income, which is much like someone earning $100,000 having a $40,000 mortgage.
I'm not horrified.
If the question is whether the debt service is too high, then we can compare it to income. If the question is whether we owe too much, we can compare debt to our net assets. But comparing an income number to an asset number just doesn't tell us much.
Wasn't The Economist's comparison (questionable though the individual bases might be, and whether a positive savings rate can also yield an increase in debt) between savings and debt as percentages?
Clearly, the existence of debt means a debt service. Whether that debt service is sustainable, seems to require analyzing the difference between after tax income and debt service over time.
At some level, though, it still seems to me that since debt service is a function of debt, there is a valid comparison to be had between income and debt, in the same sense there is a comparison to be had between speed and distance. The former is a rate, the latter a quantity, with the result being time.
That is, we "owe" 40% of our yearly income, which is much like someone earning $100,000 having a $40,000 mortgage.
Whether one takes the national debt as 64% of GDP (as The Economist does in its stats pages), or 40%, neither number seems like it should be worrisome.
I would love to "owe" only 64% of my annual income.
Perhaps this is already in the comments, but one would expect savings to grow as population grows, especially when much of the population increase is due to poor immigrants.
Beyond that, aggregate savings really has no value to anyone.
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