Sunday, March 29, 2009

Just Wondering

The US savings rate (defined as the unspent portion of after tax income) reached 5% in January. That amounts to $545 billion per year.

In 401k land, 63% of American workers participate in a 401k plan at an average investment rate of 8.3%. As a rough guess, that amounts to another $500 billion/year.

Regarding the much debauched world of real estate, 67% of American households are homeowners. Presuming not many households own their homes outright, that works out to roughly 40 million mortgages. Both for ease of calculation, and the unlikelihood of overestimating the actual number, I'll put the average monthly payment at $1000, or yet another $500 billion/year.

So, where does all this money go?

15 Comments:

Blogger Bret said...

It goes into the money supply, to which the Fed adds or subtracts additional liquidity as needed.

That's apparently not the answer you're looking for, but I can't tell where you're trying to head with your question.

March 30, 2009 9:13 AM  
Blogger erp said...

It also goes into the bottomless maw of corrupt politicians, their friends and handlers.

March 30, 2009 10:00 AM  
Blogger Harry Eagar said...

rentiers.

God bless the chile what's got his own.

If you mean, how much is se sent to productive investments, I don't know.

Many of those savers intended their money to be used for conservative, comparatively safe uses.

Suckers. It was all turned into hot money by the free market maniacs. Been busy lately, but hope soon to expand on this at Restating the Obvious.

March 30, 2009 11:16 AM  
Blogger Bret said...

Harry,

The commenter interface at Restating the Obvious is pretty lame (I tried it recently). 1000 characters max, no html, no links.

Can you use a different interface?

March 30, 2009 11:23 AM  
Blogger Hey Skipper said...

Bret:

My question was motivated largely by ignorance. I have some guesses that might ultimately make the question rhetorical, but it is best not to go there without alleviating the ignorance part first.

Regarding pure savings -- which appears to be only what have left over once spending is subtracted from after tax income, and is deposited in a bank -- that means bank balance sheets have changed: their asset ratio has increased. Which leads to asking what banks do with the deposits. Somehow, I don't think stacked in boxes in vaults is the right answer.

401k non-spending that apparently isn't savings consists of ... well, I don't know, exactly. My 401k contributions go to some stock index fund that automatically age-risk adjusts.

Mortgage payments aren't quite the same, in the sense that they largely (but decreasing over time for each mortgage) go to rent money. To that extent, they don't represent saving, but mostly do not amount to consumption of goods and services either.

Anyway, the net consequence seems to be putting at least $1 trillion/year of liquidity into the economy. Since that is roughly equal to what the government is doing, one would think the consequences would be worth mentioning. However, other than noting the fact of the US savings rate increase, I haven't seen mentioned anywhere what the knock-on effects might be for, say the LIBOR.

erp:

Now that just sounds paranoid. I have checked my various statements, and I don't see any deductions for filling any bottomless maws.


Harry:

Now that is just ranting. Regarding pure savings, regardless of how that money got used, or is getting used, they aren't suckers. I doubt anyone has lost so much as a dime in their passbook, checking accounts, or CDs.

Regardless, that is OT.

The question here is what might be consequences of adding at least $1 trillion in liquidity annually. Particularly when roughly $500 billion of 401k money amounts to enforced long term deposits.

March 30, 2009 12:12 PM  
Blogger Bret said...

Hey Skipper wrote: "Somehow, I don't think stacked in boxes in vaults is the right answer."

I think that's surprisingly close to the right answer in the simplest model.

There is an infinite amount of every fiat currency, including the U.S. Dollar. You might as well think of that pool as being stacked in an infinitely large number of boxes.

When people save amounts above and beyond what is used for investment and consumption, those amounts join all the rest of the stacks.

The Fed decides which portion of the stacks are in circulation and which part are in reserve.

March 30, 2009 12:48 PM  
Blogger Brit said...

Peanut butter-based snacks?

March 31, 2009 4:25 AM  
Blogger Harry Eagar said...

I'd love to use a better interface or get the people who pay me to improve theirs, but it's their railroad.

My post on the 3 kinds of savings is now up at Restating. I think it answers some of Skipper's questions.

I*t wasn't a rant, Skipper. Only because gov't stepped in did people not lose on passbooks, but Google Allan Stanford for endless stories about people losing billions on CDs.

March 31, 2009 7:42 AM  
Blogger erp said...

Skipper I'd feel a lot better if I were just paranoid, delusional, demented, and/or just plain wrong and that we're just going through a rough patch soon to be remedied with more of our guys getting in at the next election, but I don't think that's the case.

A couple of generations of unionized leftwing public school graduates have been softened up the citizenry to be cool with the guvmint taking over the private sector.

Reagan was right when he said, the most dangerous words in the English language are, "we're from the government and we're here to help you."

March 31, 2009 9:51 AM  
Blogger Hey Skipper said...

Bret:

I think that's surprisingly close to the right answer in the simplest model.

There is an infinite amount of every fiat currency ...


The simplest model isn't what I am getting at. Also, while it is clearly theoretically true that there can be an infinite amount of a fiat currency, in this case that isn't true.

Workers are earning some amount of money in a year that is not only finite, it is, at least in principle, possible to measure it to the cent. Practically speaking, that number is known to within a useful degree of precision.

It is also just as possible to measure the difference between after tax income and expenditures of all kinds, 401k contributions, and the portion of mortgage payments not covering goods & services.

So, no matter how the US might choose to expand the pool of dollars in the future, at the moment, those numbers above are both knowable, fixed, and non-trivial.

Which leads my right back to my original question: for that portion of at least $1 trillion that isn't going under mattresses, what are banks doing with it? At more than $500 billion per year, how long will it take US consumers to completely eliminate consumer debt?

According to the Federal Reserve, total US consumer revolving debt in December 2009 is $963.5 billion. That means that if the US savings rate remains at its current level, then that number will reach zero within two years.

Being a little more rigorous with definitions, that means real (non-mortgage) debt could be eliminated in far less time. Why? Because as I discussed in a recent post (and what should be glaringly obvious), a significant portion of what is called revolving debt is merely cash transactions carried on by different means.

It is also probably worth noting that (back on my latest hobbyhorse again) the numbers are maddeningly undefined. If I pay down credit card debt, does that count as savings, or as spending? (savings is my guess)

So, what are banks doing with $1 trillion per year? What does paying off debt at a rate of at least 50% per year mean for the economy in another year? If consumers get used to not paying revolving debt charges (the most rational approach) what will that mean? (more consumption, is my guess)

Harry:

I read everything you write at Restating the Obvious, but that interface is so comprehensively awful that I doubt I'll post any comments there again.

And no, Hot Money did not answer any questions.

There is a large stream of money not used to purchase either goods or services going into the financial system -- certainly big enough to leave a mark, which is?

(BTW, Gramm is not nearly so much a monster as Dodd, Frank, and all of ACORN. And I don't see how you can talk about any of this while leaving unmentioned the implicit government guarantee underlying the FMs.)

erp:

Watch out for ODS.

Compare now with, say, 1977. The left has come a long way to the right in the interval.

March 31, 2009 5:00 PM  
Blogger Bret said...

Hey Skipper wrote: "That means that if the US savings rate remains at its current level, then that number [consumer revolving debt] will reach zero within two years. "

Only given that a number of other assumption are true (that are usually false). For example, this assumes that the consumers with debt are well represented in the net savers, which is typically not the case - it's those households without debt that do most of the savings.

Hey Skipper also wrote: "So, what are banks doing with $1 trillion per year?"

Given the federal deficit will be well in excess of $1 T this year, there's plenty of demand for those savings.

March 31, 2009 11:37 PM  
Blogger Harry Eagar said...

You mean right now, today, what are the banks doing with it?

Sitting on it and hoping nobody examines their books, which are several multiples of a trillion light.

They disbursed money they didn't have, anticipating they would get it back, which, since their creditors are broke, they won't.

Jonathan Weil at Bloomberg has got it all sussed. US bank P&Ls are entirely mythical.

April 01, 2009 6:03 AM  
Blogger Hey Skipper said...

Bret:

Only given that a number of other assumption are true (that are usually false). For example, this assumes that the consumers with debt are well represented in the net savers ...

Okay, good point.

While I was poking around formulating my latest reply, I did stumble on to several items stating that revolving debt is decreasing. However, the trend hasn't been long enough to draw any conclusions as to whether it will be long term or significant.

Given the federal deficit will be well in excess of $1 T this year, there's plenty of demand for those savings.

Which is kind of what I thought. How much government debt do we have to rely on the Chinese buying if there is plenty of liquidity here in the US?

Harry:

Sitting on it and hoping nobody examines their books, which are several multiples of a trillion light.

SFAIK, that is not true. Most US banks have capitalization ratios completely consistent with [fill in the blank with the name I can't remember offhand] accords.

The problem banks are having is largely due to confidence: bundling mortgage backed securities of widely varying risk.

The consequence isn't that banks have nothing, it is that banks don't know what other banks have. NB: mortgage securities will (presuming I have my numbers right) put something like $1 trillion into the banking system this year.

They disbursed money they didn't have, anticipating they would get it back, which, since their creditors are broke, they won't.

If banks did not do that, there would be absolutely no point in having banks; we would all just buy bigger mattresses.

April 01, 2009 10:02 AM  
Blogger Bret said...

Hey Skipper asks: "How much government debt do we have to rely on the Chinese buying..."

We never have to rely on anyone buying any debt. The banking system will always absorb it, automatically, if there's no (or limited) demand from elsewhere. It's not intuitive as to why that is, but the mechanism is embedded in the fractional reserve system built on top of our fiat currency. Here's one guys attempt at a succinct summary:

"Fear the government will be unable to sell securities overlooks the mechanics of the process itself. The imperative of borrowing is interest rate support. By issuing government securities, the government offers banks an opportunity to exchange non-interest bearing reserves for interest bearing securities. If all banks would rather earn zero interest on their assets than accept interest payments from the government, the refusal to accept interest becomes a de facto tax on the banking system. From the Treasury's point of view the government's inability to attract any lenders would actually be a benefit. Imagine, the government spends money and the banking system, in a sense, lends the money at zero interest by refusing to accept interest on the new deposits which the government spending created. Instead, the banking system is content to leave the money in a non-interest bearing account at the Fed. The money is held at the Fed either way - it has no other existence. If the money is left as excess reserves it sits in an non-interest bearing account at the Fed. If the money is loaned to the government by purchasing government securities it again is held at the government's account at the Fed."

April 01, 2009 10:55 AM  
Blogger Harry Eagar said...

Skipper, there are several kinds of bank capital. By the one that really means something, the banks are, by one estimate, $14 TRILLION light.

Citigroup is, and has been for some time, insolvent. Nobody but nobody wants to mention the emperor's wardrobe.

April 02, 2009 4:01 PM  

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