January 30, 2006

The last great days of America? Savings Rate at Lowest Level Since 1933


Ah, what a party we threw ourselves. Future generations will look back at this one with such scorn, such disgust. Who were these people, they'll wonder, that didn't save, spent future generations money, and bought themselves Hummer H2's, McMansions, exotic vacations and lived significantly beyond their means?

After any great party, the bills eventually come due. I think the bill is in the mailbox and most folks have no idea...

Americans' personal savings rate dipped into negative territory in something that hasn't happened since the Great Depression. Consumers depleted their savings to finance the purchases of cars and other big-ticket items.

The Commerce Department reported Monday that the savings rate fell into negative territory at minus 0.5 percent, meaning that Americans not only spent all of their after-tax income last year but had to dip into previous savings or increase borrowing.

The savings rate has been negative for an entire year only twice before _ in 1932 and 1933 _ two years when the country was struggling to cope with the Great Depression, a time of massive business failures and job layoffs.

One major reason that consumers felt confident in spending all of their disposable incomes and dipping into savings last year was that a booming housing market made them feel more wealthy. As their home prices surged at double-digit rates, that created what economists call a "wealth effect" that supported greater spending.

The concern, however, is that the housing boom of the past five years is beginning to quiet down with the rise in mortgage rates. Analysts are closing watching to see whether consumer spending, which accounts for two-thirds of total economic activity, falters in 2006 as Americans, already carrying heavy debt loads, don't feel as wealthy as the price appreciation of their homes would seem to indicate.

35 comments:

azfamdeals1 said...

Just underscores how the fundamentals of thrift and moderation have disappeared from our economic life.
The new financial strategy is one of HOPE-hope ...interest rates stay low, don't lose my job,lose my pension or healthcare benefits,Social Security isn't diluted,oil prices come down, and my house always going up in value.
"Hopefully", the new American motto.

Robert Coté said...

Don't blame stupid consumers. They respond to economic stimuli not Fed lies. Buying a new $30k auto at 0% when you've seen car prices rising and the average age of the passenger fleet nearing 9 years old isn't individually stupid. Continuing to pay your kids' healthcare even if it delays your 401k match isn't stupid. The blame for the savings drop is squarely on the FEd lying about true inflation.

Anonymous said...

Is it the Fed lying about inflation?

If inflation really is high then it's usually a loser to save.

My guess: expenses are going up for most far faster than their incomes.

But for a few the incomes are exploding and they're spending like crazy.

In the USA people think that they're all in the "middle" class when they're not so they emulate these rich ones, as they buy the propaganda.

If they didn't then they'd have to consider something very emotionally disturbing to them, that maybe the socialists were right and there is class warfare against them.

They are being exploited for their naivete and desire to maintain the cohesive social structure of the past generations.

Left Las Vegas said...

Let's face it, saving is not "cool". Just ask my neighbors, who continuously try to outduel each other with nicer BMWs, SUVs, and boats. An IRA? Who needs that. You can't enjoy your H2 when you're 70. "Get rich quick" is sweeping America. And when it all ends, we'll blame the fed.

Left Las Vegas said...

Let's face it, saving is not "cool". Just ask my neighbors, who continuously try to outduel each other with nicer BMWs, SUVs, and boats. An IRA? Who needs that. You can't enjoy your H2 when you're 70. "Get rich quick" is sweeping America. And when it all ends, we'll blame the fed.

The Thinker said...

Unfortunately too many people have abandoned good sense long ago. With so much American money heading overseas and not much money coming in, it has become credit that keeps out economy afloat. It doesn’t take a genius to realize that this is not sustainable in the long term. The age of the middle class is nearing an end. I hope it was fun.

Robert Coté said...

The middle class was a transient, an anomaly, a happy coincidence of capitalism, merchantilism, technology, world wars and a bunch of other stuff people never even think about. What's weird is the american ignorance of the phenomena. Take a good look at yourself (nothing personal, I mean take inventory and be honest). It a generation, two at most there will only be rich and poor. The poor will be much much better off -on average- but still nothing like the rich. Problem is that means most of the US middle class will drop -relative- to the evolving notions of comfort and class.

r patrick said...

Robert Cote-

What sort of adjustments are we looking at and what sort of divide?

Are we talking Dickens were your professionals ( Lawyers doctors ect ) are for the most part the upper level of the lower standard deviation? And transition between the two is basically unheard of?

But who reads dickens anymore anyway?

AustinYankee said...

Dickens who? Most Americans can't name ONE Supreme Court Justice.

Folks we need to just be ready (precious metals, Euros, the Bible) and try to warn people the best we can - I don't relish the idea of ashes and sackcloth.

Wes D said...

I agree with Robert Cote:

The middle-class has been a transient figment of marketing imagination. After WW2, a suddenly affluent blue collar class with access to consumer loans and the first credit cards was able to live unlike before. This has been continuing on until today which I think is the apex, especially when a forklift driver for GM is clearing $87,000 a year.

The "American dream" has been perverted to become a notion that "he with the most toys wins" instead of the traditional pursuit of life, liberty, and happiness. With easy access to credit, the middle class has put themselves into the poor house by overspending on houses, cars, and consumer goods in a seemingly endless and unwinnable game of mimicing the affluent.

Remember in 2004 when the hot keyword was "entry-level luxury"? Remember how Chevys and Fords would be the Wal-Mart workers' cars and Acuras, Hondas, and Lexus' were the vehicles the middle class would drive? Remember in 1998 when the average salary of approx. $45,300 would purchase a very nice house at $130,000; instead today the median wage of $57,500 is stretched to afford a house at $230,000....

I could go on and on with examples of how the middle class has hurt ourselves, but the truth of the matter is Tampa, FL is a perfect example of the disparity of the future. In Tampa, you are either rich or poor. There is no middle class. Poor people live in dinky urban houses and apartment complexes and work in the service industries. Rich people live in the suburbs and tract homes. I would say that in the Tampa area in 2000, anyone making over $40,000 was in the rich catergory. Today it's closer to $80,000, making myself and all of my friends "working poor".

We really do not have anyone to blame but ourselves. A co-worker and I were discussing some proposed workplace rules. As I told him, if you are living without payments except housing and living under your means, you could say "goodbye" and be out the door. Many strapped people maxxed to the gils have no choice but to says "Yes ma'am" and work from 7-5 daily. Freedom is not having access to credit to buy consumer goods, freedom is not using that credit and being free from debt.

Anonymous said...

Just keep on believing the neo-conservative-Greenspan-Bernanke MANTRA and drive this country straight into the ground!

But there are people raking it in .... from your pocket to theirs!

Look at the cute crowd on WALL STREET who raked in 21 BILLION in Bonus money! The real estate brokers and their mega commissions... Look at Mobil Exxon who with the help of the politicians and the MEDIA took the money from YOUR pocket and put it in THEIRS and built the biggest profit in history.

And then you FOOL YOU spent the equity in your HOME......

And the cute crowd again raked in the bucks.

Oh the foolish baby boomers and younger who think they will live in style buried under a MOUNTAIN of debt!

Anonymous said...

One qualification....

As other commentaters have pointed out, the savings rate does not include pre-tax dollars placed in tax-deferred accounts (IRAs, 401(k) plans, 403(b)plans, 457 plans, etc.). Thus, the statistic--like any statistic--fails to tell the whole story. I myself place all of my savings into these types of accounts--and I'm about as thrifty as they come.

Are people borrowing too much and saving too little? Certainly. But if those tax-advantaged accounts were counted, the sensationalistic "negative savings rate" statistic would lose some of it's rhetorical power.

Tom said...
This comment has been removed by a blog administrator.
Tom said...

My friends who live paycheck to paycheck are actually managing to save some money.

I was proud of them until the wife told me this "He saves money, but not to save, he saves it so he can have money to buy things like a big screen"

So when people do save, they only save it to spend?? Pretty bad when you are so irresponsible that it's hard to save up just to buy a big screen.

Grinch34 said...

Anony said "As other commentaters have pointed out, the savings rate does not include pre-tax dollars placed in tax-deferred accounts (IRAs, 401(k) plans, 403(b)plans, 457 plans, etc.)."

This may be true to a certain extent (provided everybody has some type of tax deferred IRA). However, in 1933 they did not have credit cards.

Grinch34 said...

Anony said "As other commentaters have pointed out, the savings rate does not include pre-tax dollars placed in tax-deferred accounts (IRAs, 401(k) plans, 403(b)plans, 457 plans, etc.)."

This may be true to a certain extent (provided everybody has some type of tax deferred IRA). However, in 1933 they did not have credit cards.

Anonymous said...

According to this article from bankrate.com, IRA's and 401k's are included in the savings rate.

Former Apt. Broker said...

Tom wrote:

"My friends who live paycheck to paycheck are actually managing to save some money. I was proud of them until the wife told me this "He saves money, but not to save, he saves it so he can have money to buy things like a big screen""

At least your friend is "saving" for the big screen. Most of my tenants have big flat screen TVs that they buy on credit (I still have the same 27" Sony that I bought 15 years ago). Some things never change. When I was a kid in the 70's we had a little crappy black & white TV and when I went with my Dad to collect rents all his tenants had huge color TVs that they bought with credit...

Anonymous said...

(me again from 9:54)

Aha, here's a subtlety: The money you put into your 401K or IRA is included in the "savings rate"; any kind of capital gain within those kinds of accounts, or in houses, etc., are not.

I think it's fair to say that the USA maxed itself out at the housing ATM -- and for a long time to come. That money is gone -- nobody refinanced and then put it in their 2% checking account.

Capital gains in IRA's and 401k's in the U.S. stock markets last year? Piddling at best.

So it looks to me like this negative savings rate really does reflect the completely-tapped-out circumstances the American public finds itself in.

Alan Reams said...

This is a shift in the economic culture of America. Over the last thirty years we have had a stable period of peace and economic growth. Greenspan was lauded just this afternoon for his contribution.

Anyway, because of this stability and relative job growth, American's have become more comfortable with not saving. Add to this the temptation of 0% financing, negative amortization loans, and skyrocketing housing costs and you have a nation of consumers that have no problem spending more than they make. As Americans, we love to shop and spend. Lord help us if we hit a large recession. It will decimate the country.

-Alan
www.4MySales.com

The Thinker said...

GIVE ME LIBERTY OR GIVE ME DEBT!

Anonymous said...

My friend lives in a $3000 a month townhouse, is going to Europe for a MONTH, eats at fancy Restauraunts constantly,etc, etc,....

Last night he came over to hit me up for money because he encountered unexpected expense.

He got an insurance settlement of over $50,000 just a few months ago.

skep-tic said...

people won't give up the concept of the middle class so easily. sure there is ever-widening income disparity between the rich and the poor, but that can be solved easily-- by taxing the sh*t out of the rich.

"just tax the rich" is play #1 of at least half the politicians in this country. when all of the high paying, low skill jobs are finally gone, will resisting this temptation be a winning strategy for any politician?

if we enter a prolonged period of economic decline (which seems inevitable), expect socialism to rear its head like never before.

the average middle class person is not going to accept the idea that they have to be someone's butler to put food on the table. we will never go back to the 19th century in this respect.

instead, we will have massive groups of people on the dole, idle, as does much of Europe. Perhaps there will be an idle elite as well, since the feds don't seem to enjoy taxing investments like they do wages. anybody who actually works for a living will be screwed

desi dude said...

Govt does not compute savings by counting the different modes of savings. it is difficult to keep track.

Savings mentioned in the reports is a statistic counted as difference in income and expenditure.

It is more like a income statement of a company.
Income includes salary , receipts(individual business).
expense is amount goods bought by the consumer.
income also includes interest on saving account, but not capital gains on retirement account.

So savings rate -ve means, expenditure is more than income. remember savins in IRA is not an expenditure in this equation.
How is that possible? DEBT. More specifically Housing ATM.

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