People will save, but if inflation doesn't steal it, Wall Street will steal it with another bubble or some other financial trick. Private savings will be used for anything and everything other than investing in productive assets based in the USA.
When people refinance with cash out or draw down HELOCs, they usually spend the money.
Well, why else would they tap the cash? But I think the reality is: When people refinanced with cash out or drew down the HELOC they already had plans to spend the money,...and did.
Why blame the baby boomers? Seems the young cry for more safety net and that leads exactly to people who do not diligently live with in their means, pay down debt and plan for a real retirement. Lets blame our great grand parents for SS. Down hill from there, fleece the government for our failures, results are catching up.
To an economist "saving" and "not spending" are equivalent, but to me there seems like there is a difference. Like during the war, did people save, or were there just fewer opportunities to be extravagant?
This paper seems pretty good - and the authors have some other comments on behavior too. But for our uses, the most important take away is that consumption will be under pressure until the saving rate gets back to 8% or so. And that argues for a sluggish recovery - at best.
Savings rate was 25% in WWII - back then it was patriotic to buy war bonds to support the effort - also there was a shortage of consumer goods and rationing, and household formation was delayed until the end of the war when it took off like a rocket...
Beats me how anyone expects to ever become financially independent without saving and building up your wealth... A lot of people just want to whine and wait for the govt fairy to visit them... It's really quite simple, as long as you are willing to work for it...
WWII people had a chance to make money off the war machine and there were not much to buy due to shortages. Also they where devastated by the depression and save for the next hard time, unlike today.
Lobbyist Ben Dover, I'm not blaming the boomers (hey, that is my cohort!)
The problem is simple - if the saving rate increases that will slow the growth in consumption. I expect the saving rate will increase as households repair their balance sheets, and we see the expected saving rate based on demographics (people in the 45 to 65 age group usually save the most).
I'm just trying to figure out (without a crystal ball) - what is probably going to happen.
The excuse to spend because of inflation instead of savings is stupid. The need to accumulate cash wealth is very important even if you lose a bit from inflation.
A lot of the home equity withdrawn was used to leverage up in more real estate, and to improve the existing home too... Of course people spent a lot on other things too - if you pay off other debt with borrowing against your home, then you get a bigger interest tax deduction...
CR not directed at you. Previous thread was waiting out boomers to die off as they are the problem. The shift of extremes will leave use flat at best. Hell of a mess we are in over greed from every direction.
of the 2.3% of GDP from 2002 through 2006 of MEW, I wonder:
- where it might have been invested without a housing bubble (what sectors, which countries)
- how much of the money was available because of the housing bubble
I liked the post, just wondering out loud. Odd feeling though. It's like I felt it was quite warm, just dealt with it, and then much later finally got to see a thermostat and now feel justified in my earlier discomfort.
X & Y chromo zones like to bag on Baby Boomers, but they have the worst deal of all...
Last year was the 1st year, the 1st wave of Boomers (born in '46) were able to get at the Social Security money they've been paying in all their lives. This year, the 1947 crop can start getting money.
1948 through 1964 are probably going to be waiting for Godot, and will end up getting bupkis.
I would distinguish the savings rate from actual savings. I believe the increase in savings rate is due to people not being able to borrow. I have not seen evidence that other than the very rich and few smart souls that there is much "savings". It appears that if given means to gorge ourselves on consumption through borrowing most Americans will do so.
If 2.3% of GDP growth was MEW unless there is a replacement for that wealth that means below trend (and population) growth for a while
The biggest problem is that most the capital in this country was aligned to feed this rampant consumption. Think Vegas casinos. Where will GDP come from if people cannot borrow to use this newly built capital. This can be a long long transition.
It seems logical to assume that the savings rate has to stay high enough long enough for the excess liabilities to be paid down that have been accumulated this decade. With net worth down $15-20 tr - basically back to where it was at the beginning of the decade - the extra $7tr in liabilities that have been accumulated this decade will get paid off to de-lever household balance sheets. With nominal income at $12tr, that's at least a 3-5 years of "elevated savings" (of course, some of that extra $7tr in liabilities is getting "paid off" as we speak via loan mods and defaults).Sounds like a lost decade to me......
"1948 through 1964 are probably going to be waiting for Godot, and will end up getting bupkis. "
That's me and have prepared for it. The young can complain but I really think those of us who built wealth and income stream will lose SS and probably Medicare. Talk about sucks!
That's me and have prepared for it. The young can complain but I really think those of us who built wealth and income stream will lose SS and probably Medicare. Talk about sucks!
Nope - you'll get 'it'... just what you get won't be worth squat. Same thing will apply to 'savings' if those savings are denominated in dollars AND we have failed to invest in 'tradeable production'... graniteel isn't too tradeable or productive.
O/T: BBC radio documentary "On the Brink", part 2 covers Japan and Taiwan.
In it there is the clip which caused something of a stir. The chief finance spokesman of the Democratic Party of Japan, Masaharu Nakagawa — which is growing support in the bad economy, exposure of mismanagement scandals and might for the first time in history unseat the Liberal Democratic Party which has ruled, with Nepotism, since WWII — said he wouldn't be comfortable with USD denominated debt, would require Samurai bonds (eg US debt denominated in Yen, US would eat exchange rate loss)
It's a good piece in general, from interviews around Toyota City Japan to someone unemployed in Taiwan where the rate is 8%
O/T: NYTimes tally of stimulus spending
6% is out the door. Apparently some political pundits think they're clever by saying the economy has recovered and are trying to block the Democrats from taking credit by association with the stimulus, for the recovery that isn't there
why is the US birth rate nadir patient zero a, "I never lost money on Real Estate", husband who werks as a CRE base metal supplier, and his wife is a CRE loan mod specialist. that Drank the kool-aid, have 50k credit card debt with a 14 year old daughter in private school....making 125k annually .the last to go under?
aint neither one on the state payroll......good times.
Look at it this way though, draw a line at about 8.5% as sort of a normal long term savings rate, we started to get above that rate for a while starting in the late 60's and going until about 84. Then the savings rate starts a relentless decline (morning in America!) and eventually goes to zero and is now heading back up. Here is the question, does it need to just get up to that 8.5% level and stay there, or does it end up over shooting and fill the area under the curve between 8.5% and actual? What % of GDP does PCE have to fall to, and what will replace it? Investment? with no demand due to rising savings rate, yeah right. Net exports, well not a lot of demand for our stuff abroad, so we can only cut imports, but really doesnt replace the shrinking C in the C+I+G+ (X-M) equation does it?
Paying of debt is really neutral. After paying off debt savings begins if you practice it. My Opinion.
But that isn't the formula...
Savings equals income minus consumption. Paying off debt is savings in that time frame... but in the prior time frame the person might have had NEGATIVE SAVINGS if their consumption (supported by income & debt) exceeded income in that time frame. And there have been periods recently where we ran negative savings rates IN AGGREGATE... not good.
The net over both time frames is as you pointed out - a wash.
Plenty of graniteel in my personal house. No debt, Income stream is mostly rental housing. No matter what happens housing will be needed and rents will flex up or down. If I go down most everyone else is ahead of me. Game over. I don't see things get that bad. People think things are bad now haven't seen the past to well.
If your saving 50% of your pre-tax income, and you send 40% of your paycheck to the gubmint (well ok, they just take it), then your "savings rate" is 83.3%!!
Call me crazy, but keeping everybody busy and earning, while forcing them to save and retire debt through rationing seems to have done the trick in WWII. Why can't we do that outside of a war environment as a solution?
My worry is that purchases will deteriorate from borrowing on future earnings to pure cash and carry.
If the ability to make mundane purchases becomes constrained by the ability to access credit then almost all but smaller purchases will have an additional hurdle to making a market, and demand will suffer catastrophically.
CC, short-term credit, HeLoCs, Vendor financing go away? A lot of the big ticket item manufacturers go away.
I remember after WWII when vets would buy a lot and sink a basement with cash, make a hasty roof and wait several years to finish 1st or second floors. A fully complete home for a return vet was almost unheard of.
OT: I grew up in Saratoga in the SC Valley in the late 60s (my parents still live there). Even then, there were huge swaths of orchards lining Highway 9 (er, excuse me, De Anza Blvd). The state had so much money even in the late 70s that my UC tuition was $220/quarter.
There was nothing between S SJ and SB (except for a quick blip of SLO). LA didn't extend past Agoura to the west, Newhall to the north, and Irvine to the south. North county SD was just that - north count[r]y. Baja was still completely undeveloped.
Resource depletion & environmental degradation are the hallmarks of all species - doesn't matter if it's homo sapiens or yeast. We had a great thing going here, but all good things must pass.
Drive down any road in any town in OC, even NB, and you won't fail to spot people who aren't capable of making more than $10/hr under any circumstances pushing a stroller with 4, 5, 6 kids hanging off the sides.
One can live with out debt. Not possible in todays mind set but can be done. Debt is renting money with intent to repaid with current unearned effort. Renting cost. The debt may devalue like current housing losing savings. I do not see a value change in anything until a sale takes place setting current market price up or down. I am sure that won't wash with book learning but I have never exactly followed the rules. Rules are predictable and involve waste to me. I have borrowed money but very conservatively.
Plenty of graniteel in my personal house. No debt, Income stream is mostly rental housing. No matter what happens housing will be needed and rents will flex up or down. If I go down most everyone else is ahead of me. Game over. I don't see things get that bad. People think things are bad now haven't seen the past to well.
:: ::
Trouble is the income from rentals or whatever is 'money' and we can't eat money... If our country doesn't INVEST in productive capacity to make the stuff we consume then we have to import it. If we don't INVEST in productive capacity to produce stuff we can trade then we can't import stuff we can't make here [like easily available energy]. If that happens [or continues to happen] then we won't be able to consume no matter how much 'money' we have. Our money won't have value unless it is backed up by something valuable to the rest of the world - ultimately that comes back to our ability to produce goods in exchange for it.
In aggregate that will be the problem going forward NOT whether SS or 401K accounts are net positive or negative dollar balance... the question will be what will those dollars be able to buy.
"....So 100% savings would be impossible, 50% probably the highest possible?
Can anyone here beat 22%?"
"I pay about 40% in taxes, spend 10%, and save about 50%. I'm guessing I am an outlier"
I think I pay something like 30% or more of my income in taxes and other "crap" like medicare.
And I think last time I really thought about this, I figured I spent about 30% (with more than half as rent) , and 40% was saved.
I'm pretty young and rent in the bay area, so over 15% of everything I make is rent. Hopefully that number goes down in the future with real estate collapsing.
I honestly have no idea how people could manage to save 0%. I mean I can understand it if you are barely making it. Then again I think a lot of people in america seem ashamed to say live at home even fi they cant afford it which makes savings even less. In japan people stay at home until they can really afford it assuming their parents will let them stay. You could easily save if you werent getting sucked down by rent or mortgages that you dont REALLY need. I figure if you cannot afford to move out, and your parents will let you stay at home, you probably need to suck it up and live there and not spend money so you can save. Isnt moving out a luxury anyway? I always figured you should be able to easily afford a luxury before buying it. I guess it is "shameful" to live at home, but not shameful to be broke. I also paid for my car in cash, figuring a nice car was a luxury, but what do I know I am apparently an outlier in america. Or I'm crazy.
I tend to think that in america people dont seem to have fear for the unknown anymore? I figured that why you save right? You know for a rainy day? I mean an 8% savings rate honestly to me seems really low, but that is considered high. I don't know maybe there are too many social safety nets. I immigrated from the philippines when I was 6 years old with my parents. If you screw up there, no one is going to help you or so my parents basically told me growing up. Maybe thats why i'm a sav-a-holic.
I believe that any idea which includes rationing, quotas etc is doomed..
Have we not learned anything from this crisis? Why would you trust your future to another type of ivy leaguer? The best use of an ivy leaguers is as a shark treat.
Problem: Banks have been trying to get off of wholesale funding, but toasters and guns aren't bringing in the customers like they used to.
.
Solution: Free house with every new checking account
Dare I say, Eureka
Ok.. let us start with 'clever' whites who think they can model the universe and predict the future.
though on second thought.. it might not be necessary to do it
//Resource depletion & environmental degradation are the hallmarks of all species - doesn't matter if it's homo sapiens or yeast. We had a great thing going here, but all good things must pass.//
The disposable income part of the equation has a lot to do with your savings rate. After college I made very little money trying my hand as a musician. My savings rate was negative. After I got married, my wife went to grad school, and our savings rate was pretty close to zero, as I was supporting both of us. Now that we both work, it's more like 10-15% (more if you include her paying off student loans). My consumption hasn't changed much (it's actually higher now), but my household savings rate has gone up.
I think for this reason, an 8% savings rate in 2009 is may actually have a more pronounced effect on PCE, since people will be making less money (as a tenth will be unemployed).
and the Boomer patient zero goes all in on US treasuries, at the Apex of the dollar Hegonomy....in a secular bear bond market encompassing structural change....good fucking times....
patient zero nadir 1970 vs. patient zero 1946
60 IGNORE 1.
you dont own this land you rent it from your children........
Like BSR I have sort of checked out of this mess. I have been waiting for this mess for a couple of decades. Yes I am very worried as to where we go from here. It seems the idiots in this nation are still of the delusion the old ways are wrong and won't work. Yes as a country we need to build products we use and can export. Listen to the brain wash, The country that can build the best space program in the world can't build a car. To a point I have to agree. I see the problem but the Campaigner in Cheif is screwing it up even worse. It is not what will I do but when will they wake up and humble themselves and get to real work for the good of the country. I am waiting and will continue to dodge them the best I can.
I tend to think that in america people dont seem to have fear for the unknown anymore?
Many but not all - many of the places where people have fear & were frugal they didn't have a lot of house price appreciation, mew nor incomes to produce a lot of savings - think Rust Belt & Midwest farm regions... so even if they did save their frugality was drowned in a sea of profligacy elsewhere [coasts mostly] where incomes were higher and house prices going to the moon. Skewed results.
would be interested to see what the impact on 8% savings in zero interest accounts does to help the banks. This is probably why the banks can expect to print money for the next few years.
Gross Domestic Product (/Gross Domestic Income) is broken up into 4 main categories, Y = C + I + G + X
Consumption
Investment/Savings
Government Spending
Net Exports (note: Exporting debt cancels out imports)
.
Usually when talking about savings rates, they pull it from GDP and as such it would be measured against pre-tax or total income (eg I/Y)
.
Alternatively on a micro level, Savings rate = (current income - spending)/(current income)
current income wouldn't include unrealized capital gains but psychologically/logically we factor in other assets when saving, which is an insight CR has talked about.
You might not have a country within a few years if we do not correct this mess.. but people will accept reality only after they have run out of options.
//I have been waiting for this mess for a couple of decades.//
so all this was equal to 2.3% of GDP. In other words without that GDP would have been essentially flat in the preceeding 8 years.
Now that window has closed and we have made no substantive change to our economic policies where is growth going to come from in the future? Don't tell me from green jobs.
White House Czar Calls For End to 'War on Drugs'
Wall Street Journal | GARY FIELDS | May 13, 2009 at 10:44 PM
WASHINGTON -- The Obama administration's new drug czar says he wants to banish the idea that the U.S. is fighting "a war on drugs," a move that would underscore a shift favoring treatment over incarceration in trying to reduce illicit drug use.
We haven't learned a dam thing since the depression era. We figured out how to hid the rotten egg and repeat even worse financial conduct. This ones is a Bomb!
One problem with the GDP numbers is that they are deflated and the inflation measure (ability to maintain ones lifestyle by buying the same basket of goods over time) has been seriously understating inflation.
Shadow Government Statistics estimates this understatement to be around 6.5% per annum from 1998 to 2008. (Yes, I know that there are problems with the John Williams numbers but they are in the ballpark of the real world price changes, unlike the CPI and GDP deflator.)
If one postulates that wages have just kept up with CPI reported inflation, the dissavings of the last decade can be explained simply as people borrowing to maintain a constant real standard of living.
Well I haven't checked out yet - I keep fighting the fight. I try to help companies build businesses here in 'NAFTA Zone' and produce products we can either sell to others or consume here - will be doing it again tomorrow in fact and need to get some sleep soon.
I don't blame the gov't - they aren't my biggest hurdle... a hurdle sometimes yes but not my biggest... My biggest hurdle? Unenlightened or outright STOOOPID management. That is one high hurdle that is pretty hard to clear without straddling your balls over the bar.
NorkaWest
Understating inflation in the past will magnify the drop in real GDP now that we are reconciling accounts at all levels ex-credit bubble. I would also add that understating inflation can be used to justify a credit bubble. They should include unrealized capital gains as income to help keep things consistent as well (otherwise you would have higher inflation, but the peanut gallery would say the measurements are wrong because wages are not rising)
Does the .25 -.30 average imply one schmoe took out everything while 3 others just paid their mortgage on time? How does that "average" break down in terms of borrower behavior?
It was certainly possible to pull out 100% of equity during Countrywide's glory years.
Nine years of health hell help me check out or I would still be grinding away.
"My biggest hurdle? Unenlightened or outright STOOOPID management."
Let me guess? College educated? We seem to have instilled a false confidence in many as educated. I love education but it has become to easy to get a college degree in many cases.
We are very close to losing our other car manufacturers and that will be my point of no return.
HELOCS were good enough for Obama during the "building years" but it's just not enough now...hmmm, whats good for the goose...is poison toxin for the gander,.
Greater Fool
The sum of annual mortgage payments for 4 houses is unlikely to be 3 times the entire value of a paid off house.
3/4 identical houses, identical mortgages, they go up in price. 1 of the 3/4 has only ever paid their mortgage using money from Home Equity Withdrawal while the others paid the mortgages from their jobs as realtors
Now that window has closed and we have made no substantive change to our economic policies where is growth going to come from in the future? Don't tell me from green jobs.
Revisit Schumpeter.
Mega innovation waves come along [or peak] about once every 40-50 years plus/minus... they generate enourmous amounts of wealth & economic growth. We just peaked one of those waves [IT/telecomm] mid-late 90s and so probably won't peak again until 2030-2040.
Big nasty recessions/depressions [like1880s & 1930s] seem to come near the bottoms of these long waves... so that would be approximately 2020... meaning we haven't even seen the worst of it yet.
We have a lot more creative destruction to go through before the 'next big thing' comes along and saves us. And what will that wave be? We probably won't even know until we are so far into it that it is in effect 'near peak'. Then [like the 90s & the 20s] it will 'be different this time' until it isn't.
Oh and one last rosy thought - just because the next big thing comes along doesn't mean it has to launch & benefit us here in NAFTA Zone... Europeans did almost all the best and earliest work on the internal combustion engine but the US 'captured' and benefited most from the technology. No reason to believe the US will do that again with the next big thing UNLESS we put policies in place to make that a likely event. They aren't in place now.
So many people couldn't keep their hand out of the cookie jar. I looked through my neighborhood in the public records to see who was the equity extractors and who were the conservative spend thrifts. I was heartened at the spend thrifts but shocked at the number of people pulling out massive amounts of money. There are two types of people currently in trouble, those who bought during the boom and those who extracted equity during the boom. At least with a non-recourse state like California the people who bought and are underwater can get out cleanly. So many people with non-purchase money seconds and thirds are going to have that liability haunting them and not have the ability to deal with it properly.
O/T: Providence mayor wants to tax college students Providence mayor wants to tax college students
The mayor of Providence wants to slap a $150-per-semester tax on the 25,000 full-time students at Brown University and three other private colleges in the city, saying they use resources and should help ease the burden on struggling taxpayers.
Mayor David Cicilline (sis-ah-LEEN-ee) said the fee would raise between $6 million and $8 million a year for the city, which is facing a $17 million deficit.
I would also add that understating inflation can be used to justify a credit bubble.
Understating inflation can also overstate "productivity growth", if you assume that productivity growth is a "squeeze" number for the difference between output and inputs.
Hoocoodanode that Ayn Rand's poolboy was bullshitting us.
Let me guess? College educated? We seem to have instilled a false confidence in many as educated. I love education but it has become to easy to get a college degree in many cases.
We are very close to losing our other car manufacturers and that will be my point of no return.
Yes they were all college educated - as am I - but I worked factories floors going through college and also have run my own small biz now for 20 plus years. I can only 'eat what I kill' and no more.
Most large companies I 'support' are as bureaucratic as any gov't I have ever been involved with - I see no difference between them and gov't bureaucrats except the company ones more directly effect my income... while gov't takes a part of my income via taxes the corporate bureaucrats screw my around so bad I sometimes lose it all or never make any.
couple of random observations while watching "star trek"...
not every observation about the current demographic mess is a reflection on the substance of that generation. sometimes, it's just about the numbers.
correct me if i'm wrong, but the saving rate does not take into account contributions and expected benefits from defined contribution/benefits plans. the recovery can not occur until we figure out the final disposition of these plans. the other day, Romer mentioned the halcyon days of the 1960s. That era might have been the last where we actually grew "organically," that is, growth was result of actual output and not the value of the output. Seems that the "giant pool of money" has been growing simply by bidding up asset values, creating a vicious positive debt-price spiral, until there was no more (private) debt to inject into the system.
the inventor of the star trek replicator would win three nobel prizes: physics, chemistry, and peace.
Where did the formula come from that changed America from respecting you to make a good product at a fair price to the cheapest guy wins and screw you if you make a buck.
Dryfly: Don't you just love it when they hire you to work on XYZ, but the real mission is to justify ABC which some senior executive has a hard-on about, but doesn't have the courage to advocate openly without the cover of a consultant's report.
British independent oil trading company Trafigura is being sued for dumping 2 tonnes of H2S along the Ivory Coast. Sounds like the leak was from inside the company. Might have something to do with the feature reports on the Horn of Africa related to Somalian pirates. Europe has a lot of skeletons in its closet from coups, to bribes, to environmental destruction.. which is ironic given its common public stance. Old money feels entitled like none other
Where did the formula come from that changed America from respecting you to make a good product at a fair price to the cheapest guy wins and screw you if you make a buck.
I don't know... but if you find that guy kick his ass.
@Lobbyist: the same formula that dictated that no-talent, all-talk, ass hats were a company's most valuable assets. I'll give you a hint: it's a word that starts with "c".
savings rates must go up, PCE is down and some people say that needs to happen in the future but want it to go up now , exports need to rise but no one wants to buy our stuff, etc.
We can see the immediate financial and economic measures, and cheer or bemoan them, but what is the economics - the human activity and real production and trading of goods and services - we want more of, or less of, and that is being dimly reflected in all these numbers?
We had a demographic-driven bulge in several arenas as baby boomers reached their peak producing (earning) years. House buying, equity purchasing, consumer goods, borrowing.... A small group of pre-boomers retired and consumed goods and services produced by a large group of boomers. This was a small burden. Things were pretty good. This got reflected in many things, including low tax rates and asset prices that rose well above the rate of CPI inflation.
But in the next 5 years, the boomers begin to retire in numbers, and the tides begin to turn. The early boomers will live off the goods and services produced by a fairly large cohort of later boomers and the subsequent generations. A little tighter than the last 25 years. Late boomers will live off the goods and services of the smaller post-boomer generations. A lot tougher. We will see much higher taxes and much lower asset prices.
Fiddling with the financial numbers - asset prices etc - is of no real help without changing the underlying economics. We can only ease the coming real economic burdens in a few ways:
Increase population growth.
It's too late for natural increase alone to do the trick, so massively increasing immigration of high-producing, low-impact individuals would be necessary. Downsides are that the more people there are for the fixed natural resources of the country, the poorer we all are in open space, clean water etc. 500 years from now, our planet will be crap if we don't start to live with equal or lower populations.
Increase productivity.
If we increase the amount of goods and services produced per person, the smaller number of late/post-boomer working people can support the large boomer group's retirement without absorbing a reduction in their own material lifestyle. In the old days, this required more investment in capital equipment, to automate production processes. We still need that, but since most of what we produce now is services, we need more attention paid to improving service productivity. This is not easy at all, and it's a multi-headed hydra requiring a broad and complicated effort. Medical services is just one (important) component. Education is another. Unfortunately, we have allowed massive service sectors to operate in environments that are way less than optimal form the point of view of economic efficiency. That needs to end if we want productivity to be a part of the solution.
Since spending on improvements in service productivity is often counted in our economic stats as consumption rather than investment (e.g. education), we may not need or want to boost official savings and investment rates all the way back to the highest historical levels.
Increase labor force participation for people over 65.
If we got old folks to cook and clean for their retirement communities, and maintain the buildings and grounds, and do the books etc, then the drag on the economy (meaning younger folks' consumption) would be far less. Old people may want to be useful, and so it's probably possible to set up flexible arrangements that don't reduce older people's total enjoyment much, but do reduce the time and effort required of younger people to cater to the older folks quite significantly. I see lots of experimental self-serve boomer retirement communities arising, with different models. Good.
Increasing exports alone can't get us out of this fix. People in China aren't going to be able to take care of tens of millions of old US boomers no matter what we export to China to entice them, unless they move here (and then see 1).
CR, that is a very interesting paper. Thanks for the post linking to it.
A few years ago I calculated that underlying trend growth for the period 2000-2007 was more in the range of 1.8- 1.9% than what we had seen, and the rest of it seemed to have emerged from temporary factors. My calculations were based on cash-flow earnings (wages, dividends, interest), demographics, and by running a simulation based on sample households drawn from the Census updates and the consumer expenditure surveys.
The real question, given that we have to work off some of our over-consumption, is what is trend growth through 2015?
If one takes the assumptions in the paper seriously (that PCE from 02-06 was stimulated by at least 25-30% of the 2.3% of GDP borrowed), then we have to figure that whatever trend growth in the near-term is, it will be shifted lower by about that.
I am a little bummed out, because if I look at reported GDP and adjust that for PCE changes based on these figures, plus adjust residential with 50%,I am getting pretty close to my original trend calculation. That leads me to suspect that average GDP growth for the next 4 years or so might be a lot closer to 1.5% than to 3%. If we divert some funds from building more houses than people can possibly buy toward more fundamental production, we could hope for a productivity uptick later on. But with capacity utilization so low, it is hard to see where the money can go in the next couple of years.
Alternatively, building new power plants and spending money on public infrastructure could also help. But even solar plants seem to be running into roadblocks, so I am not sure we will see that in at least the next year and a half. There is no question that US households, in aggregate, need to save money and pay down debt. However if we don't find a way to put those savings back into the economy which will generate real future returns, we are going to be looking at a very long slump.
The bottom line for me is less the amount of the borrowing than the target of the borrowings. It is fundamentally a different economic proposition to borrow money for short-term consumption or bubble investment vs borrowing money to sink into production.
A bunch of people will want to shoot me for saying this, but we might be better off raising taxes on the better off, and trying to pay down the deficit, rather than some of this stimulus spending. We are going to need the money more later, and if we don't have a good place to spend money now, it's better to save it.
NorkaWest
Productivity is another matter. Credit bubble valuations/incomes/production would be the part related to understated inflation.
However there is another important factor. Credit can allow markets not only to be larger, but to grow faster. Faster growth is very valued by multinational companies, especially the ones that can't really get more efficient for every dollar spent.
So they do what is natural: they cut their margins, they open offices in that market (partly for competitive boots on the ground direction, partly for political reasons to secure market access). The second factor provides more jobs and more direct income, but it also raises the real income of everyone. We have already seen some bigger names pull up stakes from the USA because they don't believe it will deliver on that previously expected market growth.
That don't bet against the American consumer adage no longer holds. The growth bar is set too high to have a hope to meet the targets
edit: I've ranted about productivity once or twice before. Had further arguments about unexplained differences between countries correcting for all other factors. The Fed had 1 isolated paper in the early 90s which went nowhere. Simply put, the name may be productivity but it's only the division of 2 other primary source numbers
MaxedOutMama,
Nice post, I encourage you to post more.
.
As for the "what to do", it's too late. It's a dynamic bankruptcy. Learn the lessons for the next go around, but paying down the debt at this point is a meaningless exercise.
Towns (D,NY): [questioning why Liddy won't turn over some new plan "Project Destiny"] "Transparency would improve the image of AIG to the American people."
Liddy: [straight face] "I'm sensitive to that, and that's why we share with the Fed and Treasury every bit of information..."
Towns is the first questioner and I'm already sick of this scumbag.
"We are going to need the money more later, and if we don't have a good place to spend money now, it's better to save it. "
How much of this is a function of having an economy that is 72% personal consumption. In other words, is there no good place to spend the money now because we're entirely geared towards consuming?
(PatientRenter) - I doubt you are going to improve workforce participation much for the 65-74 year old crew, because it's already much higher than most people assume. See this table from the 2007 Consumer Expenditure Survey: ftp://ftp.bls.gov/pub/special.requests/ce/standard/2007/age.txt
For households in which the reference person is aged 65-74, close to half of their income is from wages, salaries, and self-employment. Household composition is 1.8 persons, .7 of them work.
Most people think in stereotypes, and the true picture is somewhat different. Our higher health expenditures have resulted in healthier old people, and they do work more. Also, most people overestimate the retirement income available for retirees. Go into an area with a high concentration of older people, and you find the 65 and up crowd working in the WalMarts, the supermarkets, the doctors', dentists' and vets' offices, in hotels, etc. Also, many small business owners work into their 70s.
The real limitation on older workers will be job availability plus physical limitations. A job that requires lifting 40 lbs and up is not suitable for most older workers, etc.
Now imagine if Japan didn't have the US as a market?
It would not be good. Unless we have strong pensions and strong wages then people end up doing the save, save, save thing -- this is unhelpful as all that savings is not producing any demand. We cannot do as everyone else is doing and export our way out. They have no buyers either
Worse societies with high savings and disciplined work forces have very low birth rates among the middle and upper classes. We've seen this all over the globe. So unless you want to either shut the borders or have the population entirely poor high natality immigrants and fundamentalists you have to give people more wages.
we've already tapped the "get more jobs market" by putting women in the work force and we've tapped the exaggerated home price ATM loan thing -- only things left are deflation or getting everyones wages up
if we don't the worm will turn back to high savings for several generations (a kid evicted because her family had inadequate savings like little Brianna will never be a big spender and neither will her kids
-- if savings hits above 10% or so (or taxes get too high) there will NEVER be growth in the US again
After WW2 the population grew at an extraordinary rate. Consumption skyrocketed both from delayed demand and from that population growth. And most of the worlds manufacturing was blown to heck
This allowed the economy to grow and for people to save a lot. Those WW2 conditions are not repeatable .
SrvBeach - yes, of course the problem is overconsumption compared to production. We can buy all the sneakers we want and can afford if we produce them, or if we produce an equivalent value of something we can sell overseas to pay for our sneaker imports. What we cannot do indefinitely is pay for our sneakers and our big-screen TVs with nothing but borrowed money.
NW - it's not a matter of preserving Treasury's borrowing capacity. it's a matter of recognizing that Treasury's current borrowing is overblown in relation to GDP, and that we have to find a way to bring our borrowing in line with our ability to produce and save. We are not recognizing the true cost of our plans (or lack of plans), thus we are not recognizing our true capacity, thus we are dooming ourselves to failure.
EvilHenry - it doesn't matter whether we call ourselves bankrupt or not. We are still faced with the same problem of paying for our future needs. If we can't borrow any more, then our consumption will fall to our incomes. If we default, then we are Iceland, and until we build sneaker factories here, we will be short of footwear. Bankruptcy only knocks off debts. It still leaves the bankrupt entity faced with the problem of feeding and sheltering his- or herself.
A brief rant, and then I'll shut up: I could never have believed that the political parties and ideological camps could have all simultaneously decided to walk the reality plank together, but they have. The three major poles of political thinking in the US - libertarian, conservative, liberal - are all playing some game that seems like the equivalent of economic D&D. Oh, sure, the spells they throw are different (I smite you with my amulet of Universal Health Care! - I return the blow with my Mace of Deregulation! - I block your Mace with my Scimitar of Tax Cuts!) but that's about all.
We are not going to simultaneously cut taxes for most people, meet our obligations to retirees, greatly enhance government welfare payments to the middle-class, and reduce the deficit. All the ideologies have to break before we can get on a path moving toward stability. At some level, it seems to me that a majority of the citizens realize this and are willing to compromise. But politicians do not understand that, and may not realize what a fix we are really in.
I think the high-level pols know enough to sense the right answer, but just want to get past the next election. We evolve them for maximum electability, not maximum vision.
There are Four unambiguous inflection points in the savings graph
1. Great Depression
2. WW II
3. early 80s
4. the one that just happened.
How is it that the savings rate would be compelled to decrease dramatically in sync with the enormous tax reductions thanks to president altzheimer?
Was there large MEW at that time?
Was there a world war at that time?
Just when hundreds of billions of dollars were being charged instead of paid, why would citizens also feel the need so spend even more by reducing their savings?
The current crisis is not just the result of the recent bubbles. It's been in the making for a long time.
Boomers will turn out to be an appropriate name as their wealth continues to implode.
oh yeah...and FIRST
Savings?
No, no, no. We can't have that. And the Fed is going to see to it...
hat tip jh I'm impressed...
People will save, but if inflation doesn't steal it, Wall Street will steal it with another bubble or some other financial trick. Private savings will be used for anything and everything other than investing in productive assets based in the USA.
When people refinance with cash out or draw down HELOCs, they usually spend the money.
Well, why else would they tap the cash? But I think the reality is: When people refinanced with cash out or drew down the HELOC they already had plans to spend the money,...and did.
Why blame the baby boomers? Seems the young cry for more safety net and that leads exactly to people who do not diligently live with in their means, pay down debt and plan for a real retirement. Lets blame our great grand parents for SS. Down hill from there, fleece the government for our failures, results are catching up.
To an economist "saving" and "not spending" are equivalent, but to me there seems like there is a difference. Like during the war, did people save, or were there just fewer opportunities to be extravagant?
This paper seems pretty good - and the authors have some other comments on behavior too. But for our uses, the most important take away is that consumption will be under pressure until the saving rate gets back to 8% or so. And that argues for a sluggish recovery - at best.
best to all.
Orange you gonna be able to get a tan in the can, Angelo?
Savings rate was 25% in WWII - back then it was patriotic to buy war bonds to support the effort - also there was a shortage of consumer goods and rationing, and household formation was delayed until the end of the war when it took off like a rocket...
Beats me how anyone expects to ever become financially independent without saving and building up your wealth... A lot of people just want to whine and wait for the govt fairy to visit them... It's really quite simple, as long as you are willing to work for it...
WWII people had a chance to make money off the war machine and there were not much to buy due to shortages. Also they where devastated by the depression and save for the next hard time, unlike today.
Lobbyist Ben Dover, I'm not blaming the boomers (hey, that is my cohort!)
The problem is simple - if the saving rate increases that will slow the growth in consumption. I expect the saving rate will increase as households repair their balance sheets, and we see the expected saving rate based on demographics (people in the 45 to 65 age group usually save the most).
I'm just trying to figure out (without a crystal ball) - what is probably going to happen.
best wishes.
If Social Security were a private company, it would be called the Madoff Investment Company...
25 to 30 cents for every dollar - that is astounding
The excuse to spend because of inflation instead of savings is stupid. The need to accumulate cash wealth is very important even if you lose a bit from inflation.
Hi CR, et al
Why is 8% the magic number?
A lot of the home equity withdrawn was used to leverage up in more real estate, and to improve the existing home too... Of course people spent a lot on other things too - if you pay off other debt with borrowing against your home, then you get a bigger interest tax deduction...
Lots of debt = all hat, no cattle...
How much does it cut into GDP if Americans save 8% instead of 0%?
Savings rate - is that a % of before tax income, after tax income, or some other income measure?
When can we talk about the college tuition scenario?
I got a fundraising letter from my alma mater, stating 10% of the student body may not be able to afford to return this year. (small school)
I see a rise in solicitations in the future, as colleges turn to donors for financial aid to augment tuition costs.
Is it 8% becuase this around the trend line for most of the years before savings began their 'hill dive'?
CR not directed at you. Previous thread was waiting out boomers to die off as they are the problem. The shift of extremes will leave use flat at best. Hell of a mess we are in over greed from every direction.
CR excellent job!
MEW! what's that smell?
I'm just trying to figure out (without a crystal ball) - what is probably going to happen.
So that Ebay crystal ball never came? Did you get a refund?
"Savings rate - is that a % of before tax income, after tax income, or some other income measure? "
Disposable income is after tax.
ht Jan H? Nice!
25 to 30 cents for every dollar - that is astounding
Looking back to the early part of this decade it is equally astounding it isn't MORE than 30 cents on the dollar.
Disposable, that has a bad connotation.
So 100% savings would be impossible, 50% probably the highest possible?
Can anyone here beat 22%?
of the 2.3% of GDP from 2002 through 2006 of MEW, I wonder:
- where it might have been invested without a housing bubble (what sectors, which countries)
- how much of the money was available because of the housing bubble
I liked the post, just wondering out loud. Odd feeling though. It's like I felt it was quite warm, just dealt with it, and then much later finally got to see a thermostat and now feel justified in my earlier discomfort.
Quick, dirty guestimate:
Consumption = 70% GDP
Subtract 8% moved from Consumption to Savings
.7 times -8%= -5.6%
Hopefully, less if the savings is invested in capital assets boosting the investment component of GDP.
X & Y chromo zones like to bag on Baby Boomers, but they have the worst deal of all...
Last year was the 1st year, the 1st wave of Boomers (born in '46) were able to get at the Social Security money they've been paying in all their lives. This year, the 1947 crop can start getting money.
1948 through 1964 are probably going to be waiting for Godot, and will end up getting bupkis.
NorkaWest, that seems reasonable to me. And I guess we're about halfway through that.
A few thoughts.
I would distinguish the savings rate from actual savings. I believe the increase in savings rate is due to people not being able to borrow. I have not seen evidence that other than the very rich and few smart souls that there is much "savings". It appears that if given means to gorge ourselves on consumption through borrowing most Americans will do so.
If 2.3% of GDP growth was MEW unless there is a replacement for that wealth that means below trend (and population) growth for a while
The biggest problem is that most the capital in this country was aligned to feed this rampant consumption. Think Vegas casinos. Where will GDP come from if people cannot borrow to use this newly built capital. This can be a long long transition.
"Why blame the baby boomers?"
Well, they kind of were at the wheel when the car went off the road...
You can blame the passengers or driving instructors if you wish, but I tend to blame the guy who turned the ignition key.
It seems logical to assume that the savings rate has to stay high enough long enough for the excess liabilities to be paid down that have been accumulated this decade. With net worth down $15-20 tr - basically back to where it was at the beginning of the decade - the extra $7tr in liabilities that have been accumulated this decade will get paid off to de-lever household balance sheets. With nominal income at $12tr, that's at least a 3-5 years of "elevated savings" (of course, some of that extra $7tr in liabilities is getting "paid off" as we speak via loan mods and defaults).Sounds like a lost decade to me......
"1948 through 1964 are probably going to be waiting for Godot, and will end up getting bupkis. "
That's me and have prepared for it. The young can complain but I really think those of us who built wealth and income stream will lose SS and probably Medicare. Talk about sucks!
Does paying off debt count as "savings"?
NJrenter:
I live in Morris County and I see alot of empty stores and restaurants....consumption is way down in this neck of the woods
Paying of debt is really neutral. After paying off debt savings begins if you practice it. My Opinion.
1960's: Don't trust anybody over 30
2000's: Don't trust anyone under 30
"....So 100% savings would be impossible, 50% probably the highest possible?
Can anyone here beat 22%?"
I pay about 40% in taxes, spend 10%, and save about 50%. I'm guessing I am an outlier
That's me and have prepared for it. The young can complain but I really think those of us who built wealth and income stream will lose SS and probably Medicare. Talk about sucks!
Nope - you'll get 'it'... just what you get won't be worth squat. Same thing will apply to 'savings' if those savings are denominated in dollars AND we have failed to invest in 'tradeable production'... graniteel isn't too tradeable or productive.
O/T: BBC radio documentary "On the Brink", part 2 covers Japan and Taiwan.
In it there is the clip which caused something of a stir. The chief finance spokesman of the Democratic Party of Japan, Masaharu Nakagawa — which is growing support in the bad economy, exposure of mismanagement scandals and might for the first time in history unseat the Liberal Democratic Party which has ruled, with Nepotism, since WWII — said he wouldn't be comfortable with USD denominated debt, would require Samurai bonds (eg US debt denominated in Yen, US would eat exchange rate loss)
It's a good piece in general, from interviews around Toyota City Japan to someone unemployed in Taiwan where the rate is 8%
O/T: NYTimes tally of stimulus spending
6% is out the door. Apparently some political pundits think they're clever by saying the economy has recovered and are trying to block the Democrats from taking credit by association with the stimulus, for the recovery that isn't there
44 ignores 3.
why is the US birth rate nadir patient zero a, "I never lost money on Real Estate", husband who werks as a CRE base metal supplier, and his wife is a CRE loan mod specialist. that Drank the kool-aid, have 50k credit card debt with a 14 year old daughter in private school....making 125k annually .the last to go under?
aint neither one on the state payroll......good times.
edit+2
Look at it this way though, draw a line at about 8.5% as sort of a normal long term savings rate, we started to get above that rate for a while starting in the late 60's and going until about 84. Then the savings rate starts a relentless decline (morning in America!) and eventually goes to zero and is now heading back up. Here is the question, does it need to just get up to that 8.5% level and stay there, or does it end up over shooting and fill the area under the curve between 8.5% and actual? What % of GDP does PCE have to fall to, and what will replace it? Investment? with no demand due to rising savings rate, yeah right. Net exports, well not a lot of demand for our stuff abroad, so we can only cut imports, but really doesnt replace the shrinking C in the C+I+G+ (X-M) equation does it?
Paying of debt is really neutral. After paying off debt savings begins if you practice it. My Opinion.
But that isn't the formula...
Savings equals income minus consumption. Paying off debt is savings in that time frame... but in the prior time frame the person might have had NEGATIVE SAVINGS if their consumption (supported by income & debt) exceeded income in that time frame. And there have been periods recently where we ran negative savings rates IN AGGREGATE... not good.
The net over both time frames is as you pointed out - a wash.
dryfly,
Plenty of graniteel in my personal house. No debt, Income stream is mostly rental housing. No matter what happens housing will be needed and rents will flex up or down. If I go down most everyone else is ahead of me. Game over. I don't see things get that bad. People think things are bad now haven't seen the past to well.
Patient renter
If your saving 50% of your pre-tax income, and you send 40% of your paycheck to the gubmint (well ok, they just take it), then your "savings rate" is 83.3%!!
You paying for food and thats it?
Call me crazy, but keeping everybody busy and earning, while forcing them to save and retire debt through rationing seems to have done the trick in WWII. Why can't we do that outside of a war environment as a solution?
My worry is that purchases will deteriorate from borrowing on future earnings to pure cash and carry.
If the ability to make mundane purchases becomes constrained by the ability to access credit then almost all but smaller purchases will have an additional hurdle to making a market, and demand will suffer catastrophically.
CC, short-term credit, HeLoCs, Vendor financing go away? A lot of the big ticket item manufacturers go away.
I remember after WWII when vets would buy a lot and sink a basement with cash, make a hasty roof and wait several years to finish 1st or second floors. A fully complete home for a return vet was almost unheard of.
OT: I grew up in Saratoga in the SC Valley in the late 60s (my parents still live there). Even then, there were huge swaths of orchards lining Highway 9 (er, excuse me, De Anza Blvd). The state had so much money even in the late 70s that my UC tuition was $220/quarter.
There was nothing between S SJ and SB (except for a quick blip of SLO). LA didn't extend past Agoura to the west, Newhall to the north, and Irvine to the south. North county SD was just that - north count[r]y. Baja was still completely undeveloped.
Resource depletion & environmental degradation are the hallmarks of all species - doesn't matter if it's homo sapiens or yeast. We had a great thing going here, but all good things must pass.
Drive down any road in any town in OC, even NB, and you won't fail to spot people who aren't capable of making more than $10/hr under any circumstances pushing a stroller with 4, 5, 6 kids hanging off the sides.
We are so f*cked it's not even funny.
never have an open container riding in a horse drawn buggy while listening to the radio
Im taking the under on BFF, its all one-and-done all summer......
Dryfly,
One can live with out debt. Not possible in todays mind set but can be done. Debt is renting money with intent to repaid with current unearned effort. Renting cost. The debt may devalue like current housing losing savings. I do not see a value change in anything until a sale takes place setting current market price up or down. I am sure that won't wash with book learning but I have never exactly followed the rules. Rules are predictable and involve waste to me. I have borrowed money but very conservatively.
Plenty of graniteel in my personal house. No debt, Income stream is mostly rental housing. No matter what happens housing will be needed and rents will flex up or down. If I go down most everyone else is ahead of me. Game over. I don't see things get that bad. People think things are bad now haven't seen the past to well.
:: ::
Trouble is the income from rentals or whatever is 'money' and we can't eat money... If our country doesn't INVEST in productive capacity to make the stuff we consume then we have to import it. If we don't INVEST in productive capacity to produce stuff we can trade then we can't import stuff we can't make here [like easily available energy]. If that happens [or continues to happen] then we won't be able to consume no matter how much 'money' we have. Our money won't have value unless it is backed up by something valuable to the rest of the world - ultimately that comes back to our ability to produce goods in exchange for it.
In aggregate that will be the problem going forward NOT whether SS or 401K accounts are net positive or negative dollar balance... the question will be what will those dollars be able to buy.
"....So 100% savings would be impossible, 50% probably the highest possible?
Can anyone here beat 22%?"
"I pay about 40% in taxes, spend 10%, and save about 50%. I'm guessing I am an outlier"
I think I pay something like 30% or more of my income in taxes and other "crap" like medicare.
And I think last time I really thought about this, I figured I spent about 30% (with more than half as rent) , and 40% was saved.
I'm pretty young and rent in the bay area, so over 15% of everything I make is rent. Hopefully that number goes down in the future with real estate collapsing.
I honestly have no idea how people could manage to save 0%. I mean I can understand it if you are barely making it. Then again I think a lot of people in america seem ashamed to say live at home even fi they cant afford it which makes savings even less. In japan people stay at home until they can really afford it assuming their parents will let them stay. You could easily save if you werent getting sucked down by rent or mortgages that you dont REALLY need. I figure if you cannot afford to move out, and your parents will let you stay at home, you probably need to suck it up and live there and not spend money so you can save. Isnt moving out a luxury anyway? I always figured you should be able to easily afford a luxury before buying it. I guess it is "shameful" to live at home, but not shameful to be broke. I also paid for my car in cash, figuring a nice car was a luxury, but what do I know I am apparently an outlier in america. Or I'm crazy.
I tend to think that in america people dont seem to have fear for the unknown anymore? I figured that why you save right? You know for a rainy day? I mean an 8% savings rate honestly to me seems really low, but that is considered high. I don't know maybe there are too many social safety nets. I immigrated from the philippines when I was 6 years old with my parents. If you screw up there, no one is going to help you or so my parents basically told me growing up. Maybe thats why i'm a sav-a-holic.
I believe that any idea which includes rationing, quotas etc is doomed..
Have we not learned anything from this crisis? Why would you trust your future to another type of ivy leaguer? The best use of an ivy leaguers is as a shark treat.
Snerf, $10/hr folks living in Newport Beach? That's not how I remember it when I lived there, until just one year ago. Give us details.
Problem: Banks have been trying to get off of wholesale funding, but toasters and guns aren't bringing in the customers like they used to.
.
Solution: Free house with every new checking account
Dare I say, Eureka
Ok.. let us start with 'clever' whites who think they can model the universe and predict the future.
though on second thought.. it might not be necessary to do it
//Resource depletion & environmental degradation are the hallmarks of all species - doesn't matter if it's homo sapiens or yeast. We had a great thing going here, but all good things must pass.//
The disposable income part of the equation has a lot to do with your savings rate. After college I made very little money trying my hand as a musician. My savings rate was negative. After I got married, my wife went to grad school, and our savings rate was pretty close to zero, as I was supporting both of us. Now that we both work, it's more like 10-15% (more if you include her paying off student loans). My consumption hasn't changed much (it's actually higher now), but my household savings rate has gone up.
I think for this reason, an 8% savings rate in 2009 is may actually have a more pronounced effect on PCE, since people will be making less money (as a tenth will be unemployed).
58 ignores 6
and the Boomer patient zero goes all in on US treasuries, at the Apex of the dollar Hegonomy....in a secular bear bond market encompassing structural change....good fucking times....
patient zero nadir 1970 vs. patient zero 1946
60 IGNORE 1.
you dont own this land you rent it from your children........
I prefer Meredith wrestling Erin.. both slathered in oil.. and naked
Miller Wrestles Whitney in Showdown Over Bank Stocks
Miller Wrestles Whitney in Showdown Over Bank Stocks (Update4) - Bloomberg.com
Dryfly,
Like BSR I have sort of checked out of this mess. I have been waiting for this mess for a couple of decades. Yes I am very worried as to where we go from here. It seems the idiots in this nation are still of the delusion the old ways are wrong and won't work. Yes as a country we need to build products we use and can export. Listen to the brain wash, The country that can build the best space program in the world can't build a car. To a point I have to agree. I see the problem but the Campaigner in Cheif is screwing it up even worse. It is not what will I do but when will they wake up and humble themselves and get to real work for the good of the country. I am waiting and will continue to dodge them the best I can.
I tend to think that in america people dont seem to have fear for the unknown anymore?
Many but not all - many of the places where people have fear & were frugal they didn't have a lot of house price appreciation, mew nor incomes to produce a lot of savings - think Rust Belt & Midwest farm regions... so even if they did save their frugality was drowned in a sea of profligacy elsewhere [coasts mostly] where incomes were higher and house prices going to the moon. Skewed results.
montas ankle, nothing magic about 8% ... I'm just looking at long trends and guessing from the demographics. Maybe it will go to 10% or higher.
would be interested to see what the impact on 8% savings in zero interest accounts does to help the banks. This is probably why the banks can expect to print money for the next few years.
Gross Domestic Product (/Gross Domestic Income) is broken up into 4 main categories, Y = C + I + G + X
Consumption
Investment/Savings
Government Spending
Net Exports (note: Exporting debt cancels out imports)
.
Usually when talking about savings rates, they pull it from GDP and as such it would be measured against pre-tax or total income (eg I/Y)
.
Alternatively on a micro level, Savings rate = (current income - spending)/(current income)
current income wouldn't include unrealized capital gains but psychologically/logically we factor in other assets when saving, which is an insight CR has talked about.
You might not have a country within a few years if we do not correct this mess.. but people will accept reality only after they have run out of options.
//I have been waiting for this mess for a couple of decades.//
EvilHenryPaulson,
Does GDP mean squat if you live in a unstable and dysfunctional society.
so all this was equal to 2.3% of GDP. In other words without that GDP would have been essentially flat in the preceeding 8 years.
Now that window has closed and we have made no substantive change to our economic policies where is growth going to come from in the future? Don't tell me from green jobs.
Change I can believe in.. when I see it..
White House Czar Calls For End to 'War on Drugs'
Wall Street Journal | GARY FIELDS | May 13, 2009 at 10:44 PM
WASHINGTON -- The Obama administration's new drug czar says he wants to banish the idea that the U.S. is fighting "a war on drugs," a move that would underscore a shift favoring treatment over incarceration in trying to reduce illicit drug use.
Lucifer, he'll be run out of town by the end of the week. Won't anybody think of the children?!?!?!?!?
crazyv,
Green jobs to go along with "green shoots" and "Soylent Green"
//Don't tell me from green jobs.//
"Have we not learned anything from this crisis?"
We haven't learned a dam thing since the depression era. We figured out how to hid the rotten egg and repeat even worse financial conduct. This ones is a Bomb!
EHP & Dirk:
One problem with the GDP numbers is that they are deflated and the inflation measure (ability to maintain ones lifestyle by buying the same basket of goods over time) has been seriously understating inflation.
Shadow Government Statistics estimates this understatement to be around 6.5% per annum from 1998 to 2008. (Yes, I know that there are problems with the John Williams numbers but they are in the ballpark of the real world price changes, unlike the CPI and GDP deflator.)
If one postulates that wages have just kept up with CPI reported inflation, the dissavings of the last decade can be explained simply as people borrowing to maintain a constant real standard of living.
Lobbyist Ben Dover,
I would not be so harsh to our current crop of incompetents... we have avoided some of the mistakes and found new ways to f**k up.
//We haven't learned a dam thing since the depression era.//
crazyv (profile) wrote on Wed, 5/13/2009 - 8:25 pm
so all this was equal to 2.3% of GDP. In other words without that GDP would have been essentially flat in the preceeding 8 years.
No, it would have been negative if we had used a consistent measure of the cost of living!
Like BSR I have sort of checked out of this mess.
Well I haven't checked out yet - I keep fighting the fight. I try to help companies build businesses here in 'NAFTA Zone' and produce products we can either sell to others or consume here - will be doing it again tomorrow in fact and need to get some sleep soon.
I don't blame the gov't - they aren't my biggest hurdle... a hurdle sometimes yes but not my biggest... My biggest hurdle? Unenlightened or outright STOOOPID management. That is one high hurdle that is pretty hard to clear without straddling your balls over the bar.
NorkaWest
Understating inflation in the past will magnify the drop in real GDP now that we are reconciling accounts at all levels ex-credit bubble. I would also add that understating inflation can be used to justify a credit bubble. They should include unrealized capital gains as income to help keep things consistent as well (otherwise you would have higher inflation, but the peanut gallery would say the measurements are wrong because wages are not rising)
Not eureka.Stockton or maybe merced.
Does the .25 -.30 average imply one schmoe took out everything while 3 others just paid their mortgage on time? How does that "average" break down in terms of borrower behavior?
It was certainly possible to pull out 100% of equity during Countrywide's glory years.
dryfly,
Nine years of health hell help me check out or I would still be grinding away.
"My biggest hurdle? Unenlightened or outright STOOOPID management."
Let me guess? College educated? We seem to have instilled a false confidence in many as educated. I love education but it has become to easy to get a college degree in many cases.
We are very close to losing our other car manufacturers and that will be my point of no return.
HELOCS were good enough for Obama during the "building years" but it's just not enough now...hmmm, whats good for the goose...is poison toxin for the gander,.
Lobbyist Ben Dover,
TD Canada Trust would allow you to pull 107% of your home's "value" in Vancouver (Mid 2008).
//It was certainly possible to pull out 100% of equity during Countrywide's glory years.//
Greater Fool
The sum of annual mortgage payments for 4 houses is unlikely to be 3 times the entire value of a paid off house.
3/4 identical houses, identical mortgages, they go up in price. 1 of the 3/4 has only ever paid their mortgage using money from Home Equity Withdrawal while the others paid the mortgages from their jobs as realtors
Arbitrage_Macht_Frei
1960's: Don't trust anybody over 30
2000's: Don't trust anyone under 30
.
Pop quiz hotshot, do you trust me?
Now that window has closed and we have made no substantive change to our economic policies where is growth going to come from in the future? Don't tell me from green jobs.
Revisit Schumpeter.
Mega innovation waves come along [or peak] about once every 40-50 years plus/minus... they generate enourmous amounts of wealth & economic growth. We just peaked one of those waves [IT/telecomm] mid-late 90s and so probably won't peak again until 2030-2040.
Big nasty recessions/depressions [like1880s & 1930s] seem to come near the bottoms of these long waves... so that would be approximately 2020... meaning we haven't even seen the worst of it yet.
We have a lot more creative destruction to go through before the 'next big thing' comes along and saves us. And what will that wave be? We probably won't even know until we are so far into it that it is in effect 'near peak'. Then [like the 90s & the 20s] it will 'be different this time' until it isn't.
Oh and one last rosy thought - just because the next big thing comes along doesn't mean it has to launch & benefit us here in NAFTA Zone... Europeans did almost all the best and earliest work on the internal combustion engine but the US 'captured' and benefited most from the technology. No reason to believe the US will do that again with the next big thing UNLESS we put policies in place to make that a likely event. They aren't in place now.
With those cheery thoughts - good night.
So many people couldn't keep their hand out of the cookie jar. I looked through my neighborhood in the public records to see who was the equity extractors and who were the conservative spend thrifts. I was heartened at the spend thrifts but shocked at the number of people pulling out massive amounts of money. There are two types of people currently in trouble, those who bought during the boom and those who extracted equity during the boom. At least with a non-recourse state like California the people who bought and are underwater can get out cleanly. So many people with non-purchase money seconds and thirds are going to have that liability haunting them and not have the ability to deal with it properly.
O/T: Providence mayor wants to tax college students
Providence mayor wants to tax college students
The mayor of Providence wants to slap a $150-per-semester tax on the 25,000 full-time students at Brown University and three other private colleges in the city, saying they use resources and should help ease the burden on struggling taxpayers.
Mayor David Cicilline (sis-ah-LEEN-ee) said the fee would raise between $6 million and $8 million a year for the city, which is facing a $17 million deficit.
1960's: Don't trust anybody over 30
2000's: Don't trust anyone under 30
.
Pop quiz hotshot, do you trust me?
:: ::
2020's: Don't trust anyone...
dryfly,
Thanks for the chat, as always great!
dryfly,
Past performance and cycles cannot predict the future.. especially for complex emergent systems.
@dryfly - you get it, man. Good work.
EHP,
They will just take out more student loan! We learn nothing!
Must see cartoon..
Dilbert comic strip for 05/13/2009 from the official Dilbert comic strips archive.
I would also add that understating inflation can be used to justify a credit bubble.
Understating inflation can also overstate "productivity growth", if you assume that productivity growth is a "squeeze" number for the difference between output and inputs.
Hoocoodanode that Ayn Rand's poolboy was bullshitting us.
NW
Let me guess? College educated? We seem to have instilled a false confidence in many as educated. I love education but it has become to easy to get a college degree in many cases.
We are very close to losing our other car manufacturers and that will be my point of no return.
Yes they were all college educated - as am I - but I worked factories floors going through college and also have run my own small biz now for 20 plus years. I can only 'eat what I kill' and no more.
Most large companies I 'support' are as bureaucratic as any gov't I have ever been involved with - I see no difference between them and gov't bureaucrats except the company ones more directly effect my income... while gov't takes a part of my income via taxes the corporate bureaucrats screw my around so bad I sometimes lose it all or never make any.
I never met a large corporation I didn't not like working for.
couple of random observations while watching "star trek"...
dryfly,
Where did the formula come from that changed America from respecting you to make a good product at a fair price to the cheapest guy wins and screw you if you make a buck.
Dryfly: Don't you just love it when they hire you to work on XYZ, but the real mission is to justify ABC which some senior executive has a hard-on about, but doesn't have the courage to advocate openly without the cover of a consultant's report.
NW
British independent oil trading company Trafigura is being sued for dumping 2 tonnes of H2S along the Ivory Coast. Sounds like the leak was from inside the company. Might have something to do with the feature reports on the Horn of Africa related to Somalian pirates. Europe has a lot of skeletons in its closet from coups, to bribes, to environmental destruction.. which is ironic given its common public stance. Old money feels entitled like none other
Where did the formula come from that changed America from respecting you to make a good product at a fair price to the cheapest guy wins and screw you if you make a buck.
I don't know... but if you find that guy kick his ass.
G'night all.
@Lobbyist: the same formula that dictated that no-talent, all-talk, ass hats were a company's most valuable assets. I'll give you a hint: it's a word that starts with "c".
Good Night from here visiting on the mountain.
My take on the 8% savings rate is that it is actually 2x long term inflation and not some magic number.
savings rates must go up, PCE is down and some people say that needs to happen in the future but want it to go up now , exports need to rise but no one wants to buy our stuff, etc.
We can see the immediate financial and economic measures, and cheer or bemoan them, but what is the economics - the human activity and real production and trading of goods and services - we want more of, or less of, and that is being dimly reflected in all these numbers?
We had a demographic-driven bulge in several arenas as baby boomers reached their peak producing (earning) years. House buying, equity purchasing, consumer goods, borrowing.... A small group of pre-boomers retired and consumed goods and services produced by a large group of boomers. This was a small burden. Things were pretty good. This got reflected in many things, including low tax rates and asset prices that rose well above the rate of CPI inflation.
But in the next 5 years, the boomers begin to retire in numbers, and the tides begin to turn. The early boomers will live off the goods and services produced by a fairly large cohort of later boomers and the subsequent generations. A little tighter than the last 25 years. Late boomers will live off the goods and services of the smaller post-boomer generations. A lot tougher. We will see much higher taxes and much lower asset prices.
Fiddling with the financial numbers - asset prices etc - is of no real help without changing the underlying economics. We can only ease the coming real economic burdens in a few ways:
It's too late for natural increase alone to do the trick, so massively increasing immigration of high-producing, low-impact individuals would be necessary. Downsides are that the more people there are for the fixed natural resources of the country, the poorer we all are in open space, clean water etc. 500 years from now, our planet will be crap if we don't start to live with equal or lower populations.
If we increase the amount of goods and services produced per person, the smaller number of late/post-boomer working people can support the large boomer group's retirement without absorbing a reduction in their own material lifestyle. In the old days, this required more investment in capital equipment, to automate production processes. We still need that, but since most of what we produce now is services, we need more attention paid to improving service productivity. This is not easy at all, and it's a multi-headed hydra requiring a broad and complicated effort. Medical services is just one (important) component. Education is another. Unfortunately, we have allowed massive service sectors to operate in environments that are way less than optimal form the point of view of economic efficiency. That needs to end if we want productivity to be a part of the solution.
Since spending on improvements in service productivity is often counted in our economic stats as consumption rather than investment (e.g. education), we may not need or want to boost official savings and investment rates all the way back to the highest historical levels.
If we got old folks to cook and clean for their retirement communities, and maintain the buildings and grounds, and do the books etc, then the drag on the economy (meaning younger folks' consumption) would be far less. Old people may want to be useful, and so it's probably possible to set up flexible arrangements that don't reduce older people's total enjoyment much, but do reduce the time and effort required of younger people to cater to the older folks quite significantly. I see lots of experimental self-serve boomer retirement communities arising, with different models. Good.
Increasing exports alone can't get us out of this fix. People in China aren't going to be able to take care of tens of millions of old US boomers no matter what we export to China to entice them, unless they move here (and then see 1).
CR, that is a very interesting paper. Thanks for the post linking to it.
A few years ago I calculated that underlying trend growth for the period 2000-2007 was more in the range of 1.8- 1.9% than what we had seen, and the rest of it seemed to have emerged from temporary factors. My calculations were based on cash-flow earnings (wages, dividends, interest), demographics, and by running a simulation based on sample households drawn from the Census updates and the consumer expenditure surveys.
The real question, given that we have to work off some of our over-consumption, is what is trend growth through 2015?
If one takes the assumptions in the paper seriously (that PCE from 02-06 was stimulated by at least 25-30% of the 2.3% of GDP borrowed), then we have to figure that whatever trend growth in the near-term is, it will be shifted lower by about that.
I am a little bummed out, because if I look at reported GDP and adjust that for PCE changes based on these figures, plus adjust residential with 50%,I am getting pretty close to my original trend calculation. That leads me to suspect that average GDP growth for the next 4 years or so might be a lot closer to 1.5% than to 3%. If we divert some funds from building more houses than people can possibly buy toward more fundamental production, we could hope for a productivity uptick later on. But with capacity utilization so low, it is hard to see where the money can go in the next couple of years.
Alternatively, building new power plants and spending money on public infrastructure could also help. But even solar plants seem to be running into roadblocks, so I am not sure we will see that in at least the next year and a half. There is no question that US households, in aggregate, need to save money and pay down debt. However if we don't find a way to put those savings back into the economy which will generate real future returns, we are going to be looking at a very long slump.
The bottom line for me is less the amount of the borrowing than the target of the borrowings. It is fundamentally a different economic proposition to borrow money for short-term consumption or bubble investment vs borrowing money to sink into production.
A bunch of people will want to shoot me for saying this, but we might be better off raising taxes on the better off, and trying to pay down the deficit, rather than some of this stimulus spending. We are going to need the money more later, and if we don't have a good place to spend money now, it's better to save it.
Yup, reported CPI over the last 30 years was around 4%, but the ShadowStats CPI was around 7.6%
NorkaWest
Productivity is another matter. Credit bubble valuations/incomes/production would be the part related to understated inflation.
However there is another important factor. Credit can allow markets not only to be larger, but to grow faster. Faster growth is very valued by multinational companies, especially the ones that can't really get more efficient for every dollar spent.
So they do what is natural: they cut their margins, they open offices in that market (partly for competitive boots on the ground direction, partly for political reasons to secure market access). The second factor provides more jobs and more direct income, but it also raises the real income of everyone. We have already seen some bigger names pull up stakes from the USA because they don't believe it will deliver on that previously expected market growth.
That don't bet against the American consumer adage no longer holds. The growth bar is set too high to have a hope to meet the targets
edit: I've ranted about productivity once or twice before. Had further arguments about unexplained differences between countries correcting for all other factors. The Fed had 1 isolated paper in the early 90s which went nowhere. Simply put, the name may be productivity but it's only the division of 2 other primary source numbers
MoM: +10
But are we really going to save it by raising taxes or just maintain the Treasury's future borrowing capacity?
Is this a distinction without a difference?
NW
MaxedOutMama,
Nice post, I encourage you to post more.
.
As for the "what to do", it's too late. It's a dynamic bankruptcy. Learn the lessons for the next go around, but paying down the debt at this point is a meaningless exercise.
Default the debt?
Towns (D,NY): [questioning why Liddy won't turn over some new plan "Project Destiny"] "Transparency would improve the image of AIG to the American people."
Liddy: [straight face] "I'm sensitive to that, and that's why we share with the Fed and Treasury every bit of information..."
Towns is the first questioner and I'm already sick of this scumbag.
@ MoM,
"We are going to need the money more later, and if we don't have a good place to spend money now, it's better to save it. "
How much of this is a function of having an economy that is 72% personal consumption. In other words, is there no good place to spend the money now because we're entirely geared towards consuming?
(PatientRenter) - I doubt you are going to improve workforce participation much for the 65-74 year old crew, because it's already much higher than most people assume. See this table from the 2007 Consumer Expenditure Survey:
ftp://ftp.bls.gov/pub/special.requests/ce/standard/2007/age.txt
For households in which the reference person is aged 65-74, close to half of their income is from wages, salaries, and self-employment. Household composition is 1.8 persons, .7 of them work.
Most people think in stereotypes, and the true picture is somewhat different. Our higher health expenditures have resulted in healthier old people, and they do work more. Also, most people overestimate the retirement income available for retirees. Go into an area with a high concentration of older people, and you find the 65 and up crowd working in the WalMarts, the supermarkets, the doctors', dentists' and vets' offices, in hotels, etc. Also, many small business owners work into their 70s.
The real limitation on older workers will be job availability plus physical limitations. A job that requires lifting 40 lbs and up is not suitable for most older workers, etc.
Edited to fix name
Society can only handle so much savings before it becomes deflationary. Witness this NYT article
When Consumers Cut Back: An Object Lesson From Japan - NY Times
Now imagine if Japan didn't have the US as a market?
It would not be good. Unless we have strong pensions and strong wages then people end up doing the save, save, save thing -- this is unhelpful as all that savings is not producing any demand. We cannot do as everyone else is doing and export our way out. They have no buyers either
Worse societies with high savings and disciplined work forces have very low birth rates among the middle and upper classes. We've seen this all over the globe. So unless you want to either shut the borders or have the population entirely poor high natality immigrants and fundamentalists you have to give people more wages.
we've already tapped the "get more jobs market" by putting women in the work force and we've tapped the exaggerated home price ATM loan thing -- only things left are deflation or getting everyones wages up
if we don't the worm will turn back to high savings for several generations (a kid evicted because her family had inadequate savings like little Brianna will never be a big spender and neither will her kids
Homeless girl comes to grips with a hard life - Personal finance- msnbc.com
-- if savings hits above 10% or so (or taxes get too high) there will NEVER be growth in the US again
After WW2 the population grew at an extraordinary rate. Consumption skyrocketed both from delayed demand and from that population growth. And most of the worlds manufacturing was blown to heck
This allowed the economy to grow and for people to save a lot. Those WW2 conditions are not repeatable .
MoM, That was brilliant commentary.
Thanks for returning.
yuan (aka squeezed).
SrvBeach - yes, of course the problem is overconsumption compared to production. We can buy all the sneakers we want and can afford if we produce them, or if we produce an equivalent value of something we can sell overseas to pay for our sneaker imports. What we cannot do indefinitely is pay for our sneakers and our big-screen TVs with nothing but borrowed money.
NW - it's not a matter of preserving Treasury's borrowing capacity. it's a matter of recognizing that Treasury's current borrowing is overblown in relation to GDP, and that we have to find a way to bring our borrowing in line with our ability to produce and save. We are not recognizing the true cost of our plans (or lack of plans), thus we are not recognizing our true capacity, thus we are dooming ourselves to failure.
EvilHenry - it doesn't matter whether we call ourselves bankrupt or not. We are still faced with the same problem of paying for our future needs. If we can't borrow any more, then our consumption will fall to our incomes. If we default, then we are Iceland, and until we build sneaker factories here, we will be short of footwear. Bankruptcy only knocks off debts. It still leaves the bankrupt entity faced with the problem of feeding and sheltering his- or herself.
A brief rant, and then I'll shut up: I could never have believed that the political parties and ideological camps could have all simultaneously decided to walk the reality plank together, but they have. The three major poles of political thinking in the US - libertarian, conservative, liberal - are all playing some game that seems like the equivalent of economic D&D. Oh, sure, the spells they throw are different (I smite you with my amulet of Universal Health Care! - I return the blow with my Mace of Deregulation! - I block your Mace with my Scimitar of Tax Cuts!) but that's about all.
We are not going to simultaneously cut taxes for most people, meet our obligations to retirees, greatly enhance government welfare payments to the middle-class, and reduce the deficit. All the ideologies have to break before we can get on a path moving toward stability. At some level, it seems to me that a majority of the citizens realize this and are willing to compromise. But politicians do not understand that, and may not realize what a fix we are really in.
MoM: God, you're good!
I think the high-level pols know enough to sense the right answer, but just want to get past the next election. We evolve them for maximum electability, not maximum vision.
"I see lots of experimental self-serve boomer retirement communities arising, with different models. "
In the old days, they called them "monasteries."
"....So 100% savings would be impossible, 50% probably the highest possible?
Can anyone here beat 22%?"
I pay about 40% in taxes, spend 10%, and save about 50%. I'm guessing I am an outlier Smile
I think I saw you hanging around the bottle depot the other day
There are Four unambiguous inflection points in the savings graph
1. Great Depression
2. WW II
3. early 80s
4. the one that just happened.
How is it that the savings rate would be compelled to decrease dramatically in sync with the enormous tax reductions thanks to president altzheimer?
Was there large MEW at that time?
Was there a world war at that time?
Just when hundreds of billions of dollars were being charged instead of paid, why would citizens also feel the need so spend even more by reducing their savings?
The current crisis is not just the result of the recent bubbles. It's been in the making for a long time.