Recently, there's been a lot of talk about America's low savings rate. Some even say that our country has "negative" savings. Both assertions are false. Households in the United States have an enormous amount of savings; the confusion lies in the way the government reports it.
Each month, when the Bureau of Economic Analysis releases data on personal income and outlays, it includes what it calls personal savings, which is defined as the difference between the amount we earn in wages, salaries and other income, and the amount we spend. For the past 17 months, this number has been negative, prompting all the cries of negative savings.
Lies, damn lies, and .
The problem is that the monthly-income-minus-outlays calculation does not include all the assets and investments we already own. And there are a lot of them -- more than $66 trillion, to be exact. They include everything from real estate to stocks and bonds, hard assets (other than real estate), checking accounts and, yes, even old-fashioned savings accounts.
You see, our assets are the accounting record of our savings. In other words, we accumulated those assets and investments by using some or all of what was left each month when we subtracted our expenses from our incomes. Most of the time, that money was leveraged with debt to allow us to earn a better return on the assets we bought (like when we took out a mortgage to buy real estate or bought stocks on margin), and sometimes we may have bought things entirely using debt (with credit cards and other unsecured lines of credit).
Certainly, not all the credit we had access to went for the accumulation of assets and investments. We bought plenty of other things as well, and some of them were just intended to make us feel good or help improve our standard of living -- for example, cars, clothing, education, travel, leisure, and recreation. However, the important thing to remember is that even with those purchases, made on credit, our overall net worth -- or wealth -- increased. In these last 17 months, when we have been spending more than we have been making, our assets minus our liabilities (net worth) have risen to a record high of $53.3 trillion. How could this be? It's simply because the spending raised overall economic growth, and that in turn raised employment, incomes, asset prices, and . national savings.
Why did we take on more debt, anyway? How was it even possible? Those are valid questions; after all, if households were strained by higher debt service burdens, you'd expect to see a pullback, but there wasn't any.
The usual suspects?
There are two likely answers to those questions. One is that the addition of more debt was justified from an investment point of view. In other words, we made more money by investing the borrowed money than we lost to the cost of borrowing it. The second explanation was that somebody or "something" made it very easy for us to borrow.
In the first explanation, in which investment opportunity justified taking on more debt, real estate was the driving force. Surging home prices warranted the assumption of debt even at higher fixed interest rates, because investors were getting ever-higher rates of return on their investments. Of course, as we have seen, things went a little bit too far, and now the market is undergoing a mild correction. While there will be a negative wealth effect from the correction, it is likely to be small, because home price declines will be limited and a rising stock market will offset some of the rest.
The second reason that households have been able to take on more debt is that foreigners have been pouring tons of money into the U.S. This has made credit even more available than ever, and it has kept interest rates lower than they otherwise would have been.
This foreign influx has been happening for a number of reasons, but they have nothing to do with that "rest-of-the-world kindness" nonsense or the "lending to America" gibberish that we hear so often. Those claims are a bunch of rubbish, and the people who make them have a total misconception about what is really going on.
Primarily, Japan and China are often considered America's benefactors. The Ben Steins of the world would have you believe that it is only through their largesse that we Americans can have our profligate lifestyles -- or, for that matter, even the very basics of life.
In truth, it's the other way around. I'll restate a point I made in an earlier commentary: Japan (a long time ago) and China (more recently) decided to export their way to prosperity. When they first started down this path, it was easy, because the difference in purchasing power between our currency -- the dollar -- and their currencies was enormous (the dollar was much stronger).
However, as these countries became more successful, their economies grew, and that caused their currencies to appreciate (or display a tendency to do so). This posed a problem, because a rising currency would cause their export industries to lose some of their competitive advantage. In order to restore the lost advantage, they decided, as a matter of policy, to maintain their currencies at weaker levels, and that meant they had to buy dollars. It required the purchase of dollars. And when they bought those dollars to support their export industries, they would always park them in safe, secure U.S. Treasuries.
Therefore, the money coming into the U.S. from foreigners is not "them giving us a loan to buy their goods," as it is so often stated, but rather a predictable consequence of their desire to protect their export industries above all else. (In the case of Japan, it got to the point where they literally had to move factories here in addition to buying dollars. The factory-moving part is called "foreign direct investment.")
Thanks to the rich uncle
What Japan and China have been doing, really, is subsidizing their exporters -- for decades. And like all subsidies, it comes at a cost. In this case, the cost is borne by the Japanese and the Chinese people, because the money to protect the exporters really could have been spent on or invested in the citizens of those countries. Instead, it was given to us. That's right . I said it was given to us. Only by giving that money to us can those countries maintain an export "advantage."
Now here's the great part: The fact that we get it and they don't allows us to run our personal-income-minus-spending balance in the red for 17 months straight without feeling any pain whatsoever! And as if that weren't good enough, we grow wealthier in the process and have a good time doing so! It's better than having a rich uncle!
Of course, one day it will all come to an end, when the exporters realize that their export-driven growth is a game of diminishing returns (just as the mercantilist states of the late 18th century discovered). They will begin to see that in order to achieve the superwealth and consistent growth that America has, they will have to embrace the American economic model.
To a small degree, that is already starting to happen. In Japan, both the government and the central bank are letting the economy expand, in spite of some signs of inflation, to let the nation's rebound in domestic consumption continue.
In China, official economic policy is shifting away from investment into manufacturing capacity (which has been supporting the export base, but is now showing signs of excess capacity) and toward stimulating domestic consumption and narrowing income disparities. China's per capita income is rising rapidly, and the country's vast population will become major consumers.
As these developments unfold and the Asian nations become more like us (consumers), we will become more like them (producers), and we will be selling them the things that we produce exceptionally well: information technology, health care, defense technology, financial services, mass retailing, and entertainment. Our trade deficit will narrow and the dollar will rise, not fall.
Bye-bye, rich uncle
Sadly, our rich uncle will leave us as the Asian nations spend to foster their burgeoning consumer economies. As a result, our own consumption might throttle back a bit, but our open, wonderfully adaptive American economy will hardly skip a beat. This is because it will shift from being intensely consumer-driven to being more of a supplier -- supplying the things that our trading partners around the world need and worked so hard to attain.
When that happens, you'll find that the little bit of irrelevant arithmetic known as the "savings rate" that comes every month courtesy of the Bureau of Economic Analysis will be positive and trending up again (that is, if you care at all). Our wealth will be on that same, predictable upward trajectory that it has always had. As for the rich uncle, you'll forget he ever existed.
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