August 29, 2004

MORE WOLF (via Robert Duquette):

The Great American Savings Grab (Stephen Roach, 8/27/04, Morgan Stanley)

Never before has the world’s leading economy been saddled with such a severe shortfall of saving. Ironically, America has not had to pay a price for its extraordinary profligacy -- at least not yet. The US has borrowed freely from abroad and converted asset-based saving into newfound purchasing power. In my view, this cannot continue. There’s nothing sustainable about the growth dynamic of an increasingly saving-short US economy.

The numbers speak for themselves. Driven by a veritable collapse in personal saving, in conjunction with a dramatic deterioration in the federal government’s budget position, America’s gross national saving rate -- the combined saving of households, businesses, and the government sector -- fell to an all-time low of 12.8% of GNP in early 2003. Nor has it recovered much since, rebounding to only 13.8% in early 2004. Stripping out the depreciation of worn-out capital in order to get a cleaner read on the domestic saving available to fund net growth in productive capacity, America’s net national saving rate plunged to a record low of just 0.4% in early 2003. While there has since been a modest rebound to 2.0% in early 2004, there can be no mistaking the sharp break from historical trends; by comparison, the US net national saving rate averaged 5.3% in the 1980s and 1990s and 9.6% in the 1960s and 1970s.

In a world where saving must always equal investment, America’s saving shortfall has profound implications.

Or, at least, it would if there were one. It's helpful when you look at a situation that common sense tells you can not exist to assume you aren't seeing the whole picture. Here's what Mr. Richter has missed:
Household Wealth Rebounds (Spotlight on Financial Services, February 2004)
A year ago in this column we wrote that “uncertainty is the enemy of growth,” and so it apparently was. The looming conflict with Iraq was depressing expectations, holding down stock prices, and discouraging business investment. Otherwise, fundamentals for a strong recovery were in place. As Federal Reserve Chairman Alan Greenspan predicted in February 2003, a speedy resolution of the uncertainty associated with military action would remove those impediments to growth. This forecast proved to be right on the money.

We know that overall growth surged in the second half of 2003. Now we see from newly released Federal Reserve data that American household wealth has rebounded almost to the historic high that it reached when the stock market peaked early in 2000. A rebound in equity prices that began in March 2003, coupled with rising home prices, propelled U.S. household net worth to $42.1 trillion by the end of the third quarter of 2003. Given that stock prices rose an additional 12% in the fourth quarter, household net worth probably reached $43 trillion by the end of 2003, not far below the record of $43.6 trillion reached in the first quarter of 2000. Net worth has jumped $3.5 trillion since the cyclical low reached in September 2002, with 43% of the increase attributed to rising value of stocks and mutual fund holdings, 8% due to rising home equity, and the remainder due to larger holdings of bank deposits, pensions and other financial assets. Household net worth is defined as the value of all household assets (stocks, mutual funds, pension savings, deposits, ownership of small businesses) minus liabilities (mortgages and other consumer debt).

In essence, what's happening is this: we're borrowing money from foreigners at 2% (or whatever) so we can invest our money at 6%. You have to be blinded by ideology to see that as a bad deal.

Posted by Orrin Judd at August 29, 2004 4:51 PM

It's called "speculating on margin".

Posted by: Robert Duquette at August 29, 2004 9:45 PM

A lot of that wealth is mere paper profit. All it takes is one major successful terrorist attack and the markets could wipe out 60% of it in 2 days. Or indeed any other number of panics.

Posted by: Chris Durnell at August 30, 2004 12:52 AM


How much did 9-11 wipe out?

Posted by: oj at August 30, 2004 7:08 AM