Gray Flannel Dwarf

8/2/2005

“Booming Economy” at the expense of personal savings

CNN/Money is currently featuring an article titled “The zero-savings problem“. It notes that:

Even as a government report Tuesday showed the national savings rate at zero — that’s right nada — the rise in the value of homes has given the average U.S. household a net worth of greater than $400,000, according to a separate report from the Federal Reserve.

It goes on to note, though, that people are using this new-found equity to put cash in hand. And lest one think “zero percent” is an overreaction:

June was only the second month the rate was at zero since the monthly figure started being calculated in 1959. The annual rate for 2004 was 1.8 percent; the last time the annual rate was lower was 1934.

Strong auto sales in June played a big part in the latest read on the savings rate. The government counts the entire price of the autos purchased during the month, even though most consumers pay for vehicles over time.

But even if that zero savings rate is a bit of a quirk, the trend towards lower and lower savings rates is unmistakable. In May, before the current “employee pricing” offer from automakers, savings rate was only 0.4 percent, or 40 cents for every $100 of take-home pay.

According to the article, more and more homeowners are saving less, opting instead to take out equity in their home and spend. What’s worse, it’s suggested that this is the one thing holding the the US economy — touted as thriving by the current administration — afloat.

Again, per the article:

“We’ve backed ourselves into a very dangerous situation,” said Dean Baker, co-director of the Center for Economic and Policy Research. “The economy is dependent on everyone consuming like crazy. If everyone heard my diatribe and said, ‘Yeah, we better start saving,’ the economy would go into a recession.”

So, okay, people are saving less, and credit card use is up… these are old hat. But to have savings hovering near zero and have the ensuing spending be one of the only things that keep the economy from going into a tailspin? That’s bad news folks.

This will only be further impacted by the housing bubble… and while I don’t expect the bubble to violently burst — housing is quite illiquid, compared to other investments, as people need places to live — the fact that people are using the equity in their homes to pay down their bills and debt is a frightening proposition, as even a 5% drop in home values could mean people have leveraged themselves into negative equity… not to mention those who have been duped into zero-equity home loans.

And finally, I can’t shake out of my mind the recent concessions handed over to the credit card companies by BushCo. The companies can now charge more and it’ll be harder to file for bankruptcy.

Don’t get me wrong, I’m not one to disavow personal responsibility. Consumers shouldn’t treat their CCs like cash, and if people can’t be persuaded to save more than fifty cents on every hundred bucks they earn, I can’t say I’m very impressed. At the same time, however, the stage has been set for those in tenuous situations to fail — and if/when they do, I can’t see how it wouldn’t have negative affect on the economy.

I forsee the possibility of us all being stuck in a very precarious situation. If people don’t repay their debts, they get bludgeoned by Ma Credit. If they don’t continue their consumerism, though, the economy goes downhill real fast.

I’ve never been a predictor of economic doom before, but this is frightening stuff…and yet this administration keeps telling us all that the economy is doing just fine…

…then again, has it ever told the truth before?


cswiii @ 5:48 pm