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#1
03-28-2007, 02:31 PM
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The Savings Rate... Ignore It!
Warning = Long.
The savings rate is an old, distorted measure of what Americans 'save' in an effort to keep track of spending and net worth in this country by the Fed. The news media uses it as a reliable scare tactic to make you think you/we are all going to die poor. As a simple measure, it may seem logical that Current Salary - Expenses = Savings and should be used as such, but it leaves so much out [and has been changed multiple times] that it's really useless. 'Savings' is the gov't broad measure of DPI. DPI does not include realized or unrealized capital gains, IRA gains, ANY guaranteed pension plans or gains, or housing gains. In addition, years and years after the fact, the gov't goes back and makes massive modifications to past data, showing the uselessness of most of the current data. The personal savings rate is not correlated with wealth accumulation. American's net worth hit another alltime high this month. Things are not as bad as they seem. 'BEA's October 1998 revisions were significant because they shifted capital gains from personal saving to business saving. ' In 1999, the BEA made further revisions. More details available at the Bureau of Econ Analysis. 'The net effect of BEA's two revisions, however, was a continued decline in the personal saving rate. However, if we also recalculate the personal saving rate by adding the capital gains back into personal income, the personal saving rate, ... turns out to be much higher-12% in 1992 and 7.3% in 1998...' From David Malpass, last summer: 'Personal income grew a more modest 0.5% in July from June. However, personal income for the six months through June were each revised up. As a result, personal income in July was 7.1% more than personal income in July 2005, an increase of $727 billion at an annual rate, of which $84 billion was due to the upward revision, which alone more than offset the increase in gasoline expenditures. The revisions largely reflected wage and salary income running well above the government's initial estimates, reflecting a robust labor and compensation environment. " Yes, shockingly, the gov't is bad at measuring big things, but we are $727 billion better off income-wise than previously estimated. 'The U.S. household sector is the world's largest net creditor, with a maturity structure well positioned for rate hikes. ..We agree that the increase in energy prices subtracts some from other types of consumption. ' 'In terms of household financial net worth, the U.S. has $27.6 trillion, up $1.9 trillion or 7.4% since March 2005. This measure includes mortgages and credit cards in debt but excludes houses in assets, so broader definitions would be even more favorable to the U.S. By this measure, Japan has $9.8 trillion, the UK $3.9 trillion, Germany $3.3 trillion, and France $2.7 trillion. ' And leveraged...? 'While total household liabilities rose $1.3 trillion in the four quarters through the first quarter of 2006, US households added $3.2 trillion of financial assets and $2.8 trillion of housing assets. That's $4.7 trillion more in net assets. ' Financial net worth reached $27.6 trillion in March, up $1.9 trillion or 7.4% from March 2005, a savings rate of 20.9%. Net additions to financial assets were $675 billion in the first quarter at an annual rate, and showed a savings rate of 6.2% over the past year. Conceptually, it would be useful to think in terms of "risk-adjusted savings". This would give value to the safety of savings, not just the magnitude. For example, houses and stocks are less safe in the short term than a bank account, so they could be discounted somewhat. ' The sharp October 1998 decline in the personal saving rate was a statistical aberration and coincided with BEA's technical changes. ' In the WSJ last year, Economy.com [Moody's sub] showed how the 'official savings rate' for those under the age of 42 is negative 18%. -18%!! So, let's say, using round numbers, that income for that group is $50k, those people are spending $9k more than they make in salary *Each and Every Year*! Until age 42, on average. Over 20 years, say, that's $180k! [feel free to add or subtract the salary to get a different number.] This completely fails the smell test. Savings rate is badly flawed for all of the well-known reasons, but this makes it sound even more ludicrous. The 'official' rate may measure something, but it sure doesn't measure a person's real savings since it excludes all market and housing gains, investment and franchise gains, and also started to exclude mutual fund distributions some years ago. According to the Fed: 'In constructing the NIPA, the U.S. Commerce Department's Bureau of Economic Analysis (BEA) treats consistently the flow data associated with current production. As a result, the NIPA personal saving rate gives an incomplete picture of household savings behavior. For example, the NIPA measures of income and savings exclude the sale of or change in the market value of existing assets. For financial assets, personal income does include dividend and interest income to persons, but excludes capital gains and losses. Therefore, the recent volatility in the stock market would not show up as changes in personal income and would not be included in the NIPA measure of personal saving. For nonfinancial assets of households, primarily housing and consumer durables, the NIPA includes service flows from housing as consumption, but treats expenditures and not service flows from consumer durables as consumption. Similarly, personal expenditures on education and training are treated as consumption. These accounting practices overstate consumption and understate saving.' http://www.frbsf.org/publications/ec...el2002-09.html I think household NW [hnw] should be used. Total US hnw is $50 trillion, but includes RE. If, if, there is a housing bubble, we should exclude that, so financial NW, ex-RE, in the US is $26 trillion. That's after deducting mortgages and cc debt. Our GDP is $12.5 tn, so just over 2x GDP has been saved by US citizens. Now look at high-saving Japan: They have 10.4tn in FNW. Their GDP is just over $5tn. They have saved 2x their GDP. We save more than Japan. The fact that a US Individual looks at cap appreciation and long-term investing as 'savings' penalizes the official 'savings rate' as based on current income and consumption. If you quit your job to start a McDonalds, you will be deemed as not saving any money, probably dis-saving for years, even if your McD is worth $2mm in 5 years. That makes no sense. US Household Net Worth ($ Trillions) 1985 Net Real Estate - 3.8 Stocks - 1.3 Cash/bonds - 3.8 .... Consumer Debt - [0.6] Total 14.1 trillion 2005 Net RE - 12.6 Stocks - 10.2 C/Bonds - 8.8 ... Con Debt - [2.2] Total $51.1 Trillion. So, RE net of mortgage has gone from 27% of HNW down to 24.6%. Debt has gone from 4.3% to 4.31% of HNW. Not much of a housing 'bubble' in historical terms, either. This is a classic example of how one poorly designed stat gets distorted even further in reporting by 22-yr old Columbia grads who can't balance a checkbook. 
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