Are negative savings predictor of disaster?
As an ongoing economic analyst, I increasingly have become worried about the
declining U.S. per capita savings rate.
With more than 70 percent of America's world-dominating gross domestic
product being consumer-driven, is the mighty United States economy headed for a
crash that could exceed the decade of the 1930s? In an eerie forerunner,
America's worst depression ever had been preceded by a gigantic stock market
bubble.
After reaching an inflation-adjusted $6,800 per capita savings rate in the
mid-1980s, a binge of consumer spending activity had precipitated an
uninterrupted savings decline, which decidedly turned negative in 2006.
But something doesn't add up.
While household net worth at the peak of the mid-1980s stood at about
$250,000, it now stands at nearly twice that number and still is climbing.
The answer may lie in the fact that of today's $55.6 trillion in household
net worth, only $6.7 trillion is secured in checking accounts, time deposits and
money-market funds.
The enormous gap between these two numbers is found in the tangible and
intangible risk capital that has gathered steam in the last 20 years.
This not only reflects the surging value of the stock markets, real estate,
corporate and government bonds and collectibles such as art work and gold but
represents the underpinning of most of America's wealth.
On top of that, such automatic check-offs as 401(k) accounts, pension fund
contributions and company stock purchase plans represent enforced savings not
considered in government statistics.
These are an archaic method that the government has used for many decades to
evaluate the differences between consumer income and expenditures.
It's a far cry from the old-fashioned measure of the hard-working payrollers
depositing part of their earnings into a savings account.
Such thrift is no longer fashionable in the current U.S. generation of
unprecedented expenditures, but it also has become a new way of life among the
emerging nations throughout the world. This is one of the reasons that the
global economy has generated the increasing liquidity that is lubricating the
surge of global investments into all aspects of the American economy.
The virtue of savings, which has for years allowed Japanese workers to sock
away double digit percentages of their annual earnings, today is considered
counterproductive because it has kept that nation's consumer sector at a snail's
pace growth rate.
A similar factor can be found in
Germany, the world's third-largest economy, in which an overwhelming
percentage of its gross domestic product is composed of exports.
This is a hangover from Germany's traditional financial discipline compounded
by the traumatic impact of
World War II and the post-war period.
Even China, the world's most aggressively expanding economy, is attempting to
redirect its massive currency accumulation into a still embryonic consumer
sector.
America's residential housing industry is the best example of how the
nation's $13.5 trillion gross domestic product has grown so exponentially.
Despite the current home-building recession, the value of domestic residences
and appurtenances still account for 20 percent of the nation's total household
net worth.
Another factor not considered in today's archaic method of measuring savings
is the increased value of household net worth in real terms. Since prices rose
by 22 percent in current costs, from 1996 to 2006, total household values
accelerated by a similar amount during this decade.
But with the number of households growing by 15 percent during this period,
these adjustments alone increased total household net worth by 31.7 percent by
the end of 2006. This was one of the greatest 10-year increases ever in American
history.
Although the danger of consumer consumption slowdown continues to hover over
America's disproportionate growth economy, the evolution of the world's dynamic
economic expansion makes such a development unlikely.
Only an irrational repeat of the 1930's Smoot-Hawley tariff walls, which
throttled world trade and ushered in the decade-long depression, could reverse
America's growth trend of the last 25 years.
