Economics

Savers Hate America

Ben Bernanke wants you to be a consumption unit. Why are you ignoring him?

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You know what you almost never hear about anymore? How the American consumer will lead the way to an economic recovery. Just a year ago learned pundits were holding out hope for another consumer-led recovery. The New York Times was still clinging to the consumerist wreckage as recently as May. Just last month, the remarkably durable idea that U.S. consumers will restore prosperity was still generating such brilliantly tautological news as "Consumers give boost to holiday sales."

But the mirage of the consumer-led recovery has been fading for years. Retail sales rose 0.6 percent in the month of December [pdf], an increase that fell well below expectations of 0.8-0.9 percent, and a letdown after a Festivus season filled with tales of confident, resurgent shoppers.

Don't just stand there; buy something!

Consumer stinginess didn't just disappoint retailers who have now endured anemic or declining rates of Christmas-season personal consumption expenditures for four straight years. They are thwarting Ben Bernanke's Plan A (which is the same as his Plans B through Z) for reviving the American economy. The Federal Reserve Bank chairman's transparent efforts to ramp up demand—evident in the Fed's multi-trillion-dollar monetary loosening and even in its comic books—depends not just on creating inflation but on getting people to respond to inflation. Without more consumers flushing ever larger numbers of devalued dollars down ever greater numbers of drains, the Fed's bubble-centered growth strategy (or for that matter the Treasury Department's own trillions in fiscal stimulus) is a bust.

That this is the same pneumatic strategy employed by Bernanke's predecessor—and by secretaries of the Treasury long before Tim Geithner—does not mean it makes any sense. As Mark Skousen argued last year, economic growth proceeds from value, savings, and investment. Follow a strategy of spurring and riding the American consumer and you'll just end up continuing a succession of bubbles: from energy to real estate to financial services to dotcoms to real estate again and now (possibly) back to financial services.

It's telling that while the Fed and the Obama Administration use every known policy tool to discourage savings, you're hearing more talk of the Solow–Swan growth model (which among other things underscores the importance of savings rates in economic growth) and even occasional kind words for savers from Geithner. This is the tribute vice pays to virtue. In the Keynesian universe of policy-making, boosting "aggregate demand" is the only goal, and economic activity, no matter how frenzied or nonsensical, is the only tool.

But consumers are not delivering the goods this time—mostly because they can't. A dismaying Deutsche Bank report on household balance sheets shows that the ratio of household assets to liabilities—which averaged about 2.3 to 1 from 1980 to 2008—is now down to a little more than 1.5 to 1, and still falling. The American way of dealing with a problem like this is to buy on credit, but this has become more difficult to do, as credit delinquencies, after a 2010 remission, have spiked again.

It's hard to overstate the direness of American household finances. While the 9.4 percent unemployment rate gets all the attention, the real story is Americans' massive loss of wealth. Federal Reserve data show U.S. household net worth at $53.5 trillion—more than $5 trillion below where it was in 2007, although we're told the recession ended more than 18 months ago. As house prices continue to slide (and are expected to keep falling throughout this year), Americans are seeing a steady depletion of what is for most people their highest-ticket asset. They're also seeing a steady decline in the equity portion of their homes, which has been in almost constant decline since 1983 (when homeowners had about 70 percent equity) and last month fell to an abysmal 42 percent. (Homeowners' equity portion was as high as 80 percent in the 1950s.) The result is that the asset/liability ratio Deutsche Bank describes above will continue to get worse.

There isn't really any appeal from these numbers, but the solons of the economy, and their media stooges, keep trying. Every month sees a new hubbub about "core" CPI or consumer confidence—updates as regular and meaningless as late-Soviet crop reports. When President Obama in 2009 let slip his famous statement "We are out of money," he might more accurately have phrased it as "We are out of value." Decades of economic policy focused on everything except the creation of wealth have produced the logical result.

But while policy makers respond by digging the hole deeper, the citizens have begun trying to climb out. The recent surge in credit defaults interrupted a longer-term trend in deleveraging, with credit card debt now in decline for more than two years and millions of Americans giving up on credit cards entirely.

Like gold, it has never gone to zero (except once)!

People are also earning and saving more. According to personal income and savings data from the Bureau of Economic Analysis, monthly personal income, which remained flat at $12-$12.1 trillion through most of 2008 and 2009, rose steadily through 2010, with a total income figure of $12.7 trillion in November [pdf]. The percentage of income Americans are saving has also been hiking up by fits and starts. On a quarterly basis, personal savings (disposable personal income less personal outlays) are nearly 6 percent; over the past 12 months they averaged a bit below 5 percent. That's still well below the rate of 8 percent or more Americans were saving in the early 1980s, but that shouldn't be surprising given the difference between that era's double-digit interest rates and effective negative interest rates today.

These are monkey's-paw improvements, and there are pessimistic explanations for most of them. Much of the decline in credit card usage has come simply from maxed-out spendthrifts going broke. Ditto for the steadying of home equity, auto, and other forms of credit. Even the increases in disposable income and savings result, in some part, from personal bankruptcies and foreclosures, which have freed up dollars that would otherwise have been committed to hopeless piles of debt.

It's also dangerous to expect large-scale philosophical shifts from short-term events. Brute-force deleveraging may be a long-overdue step, but it hardly proves Americans have experienced a mass conversion to the virtues of thrift and wealth creation.

But it does seem like one of the great dumb ideas is dying out: the belief that a bunch of unproductive slobs in "consumption partnerships" could continue indefinitely disposing of the fruits of capitalism while generating little of value beyond debt consolidations, greater-fool bailouts, and continuing education. It was the innumerates' version of The Secret, a way of life based on wishing, and it always had detractors. Wrongheaded as the popular griping about foreign imports or outsourcing of jobs may be, it stems from a legitimate suspicion—that an economy biased so heavily toward consumption and away from value creation is unlikely to endure.

Now that the party has ended, America's citizen-consumers are, by and large, doing the smart thing: opening penny jars, saving more, buying judiciously or not at all. This is what makes the Fed's quantitative easing and below-inflation interest rates not just stupid but evil. By devaluing the currency, you punish people who are just starting to learn the importance of hanging on to their money. You destroy the wealth of savers. You favor non-productive over productive capital. Worst of all, you make a mockery of people who believe thrift is important and like the idea that the dollar is worth something. Those may seem like quaint old ideas, but they're shared by the overwhelming majority of Americans and they deserve some respect.

Tim Cavanaugh is a senior editor at Reason magazine.

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  1. BUY MORE SHIT. NOW!

  2. It’s only a matter of time before they stop surreptitiously penalizing savers and come right out and impose a significant tax on the existence of traditional savings account balances.

    1. Why bother when you can just “tax” savings through inflation?

      Also, the bank fees and service charges levied on bank accounts are already a form of savings tax, albeit to the benefit of the bank rather than the government.

  3. Forgive me if my economics aren’t sound, but I’m a little concerned about savers. Imagine you’ve done the “right” thing and have put money away your whole working life. Each time the dollar is devalued, it’s a punch to your savings gut. Compare that with people who have saved little or nothing. What do they have to lose? Also, it seems that many of the dollar-deflating decisions are made for their benefit. Any thoughts?

    1. Re: Matthew,

      People save not to make money but to be able to be able to consume later. This is called putting off present consumption in favor of future consumption. Even if the money you save is being devalued, it is better to have savings set aside if you expect a future consumption than to have none.

      It is true that inflation penalizes savers, which is one of the reasons inflation is so incidious, as the government taxes income and then taxes the same income stored as savings through an inflationary process.

      1. “People save not to make money but to be able to be able to consume later.”

        Speak for yourself.

        1. Re: The Gobbler,

          Saving does not mean investing. You can use your savings to INVEST, but the mere process of saving is not investing, just like having wings does not mean you’re already flying.

      2. Well, in the long term, we’re all dead. I expect to die in harness anyway. I’m at the very end of the baby boom.

    2. The Fed will continue its policy of inflation. Deflation, which would actually be a god send because the price drops would spur recovery but a lot of temporary pain. Buy silver coins as an insurance policy. The idea isn’t to make money, it is to retain the purchasing power you have now.

      I’ve been debating with myself if hyperinflation is on the table. There has been some talk that the huge spike in gas prices right before the crash was an outbreak of hyperinflation that was put in check with destruction of wealth in the crash. I’d certainly pay attention to oil and food prices. Remember, prices increases due to inflation aren’t seen across the entire market. Typically it certain areas. I see it in the Stock Market, oil, food.

      1. it’s on the table. But we’ll have deflation first. Think about it: Rising prices will pressure people to save more or default, and the public’s capacity to reduce debt far outstrips the government’s capacity to print, in the short term.

        1. in the long term, the government “wins” and we get hyperinflation.

    3. Governments have used inflation as a means of penalizing savings, so the key is to apply your savings to the purchase of assets that will keep their value over time.

      KevinC suggests silver, but silver, like most commodities has actually lost value over the long run (100+ years). Also, it does not earn an income while it is held and imposes a cost to hold it (safety deposit boxes, etc.).

      I can’t offer any specific investment advice to conserve your savings (even real estate is not 100% secure as it depends on local economic conditions), but in general you want an asset that 1) retains real value and 2) provides a return on your savings.

      1. I am not worried about retaining value over 100 years…silver had done pretty well over the last 5 however. ‘Real’ value doesn’t have to pay interest to keep you interested.

      2. KevinC suggests silver, but silver, like most commodities has actually lost value over the long run (100+ years).

        No it has not.

        A 1913 Dollar had the purchasing power of $22.13 today – according to the bls

        http://data.bls.gov/cgi-bin/cp…..year2=2010

        An ounce of silver in 1917 was worth $.82
        http://query.nytimes.com/gst/a…..5B888DF1D3

        Today its worth $28.79

    4. I don’t worry about that. Switzerland has been a safe haven from economic turmoil and other disasters for hundreds of years. Their economy and banking system has been super stable for centuries.
      I don’t need to worry about what is going bust next. I opened an online Swiss brokerage and bank account without leaving home. I can buy foreign bonds, stocks denominated and earning their revenue and paying dividends in a much more stable currency, or just stash cash in a CD in a variety of currencies in super safe Switzerland without leaving home.

      Your IRA can even open an account in Switzerland!!

      See for yourself: http://swissbankaccounts.webs.com/

  4. You know what you almost never hear about anymore? How the American consumer will lead the way to an economic recovery.

    Maybe because it’s bullshit.

    The New York Times was still clinging to the consumerist wreckage as recently as May [of 2010].

    That’s because the paper peddles bullshit.

    But consumers are not delivering the goods this time?mostly because they can’t. A dismaying Deutsche Bank report on household balance sheets shows that the ratio of household assets to liabilities?which averaged about 2.3 to 1 from 1980 to 2008?is now down to a little more than 1.5 to 1, and still falling. The American way of dealing with a problem like this is to buy on credit, but this has become more difficult to do, as credit delinquencies, after a 2010 remission, have spiked again.

    Yeah, sure… Except, even if all consumers stopped being misers, that does not MEAN a “recovery” will exist once they start dumping dollars at the local Macy’s.

    The only thing that drives a recovery is PRODUCTION, and in order to PRODUCE, you first have to have CAPITAL (which comes from savings), CAPITAL GOODS, and LABOR.

    If CAPITAL GOODS are not available (and the bailouts have a LOT to do with this as machinery and real estate are still locked in unprofitable ventures, instead of being auctioned off), there can be no production. If there’s no CAPITAL (which comes from savings), there can’t be any start-ups, no payroll, no initial inventory, no nothing. And without LABOR (and I mean AFFORDABLE labor), better pack and go somewhere else.

    1. You’ve got it all wrong do. We need to increase aggregate demand! Buy iPods until we’re all rich!

      1. You’re both wrong. Only government spending on our behalf can stimulate economic growth.

        1. Spending your way out of debt is the same as fucking for virginity!

          1. In that case, I’m willing to do my bit for virginity.

            1. Me too.

              1. Me three…some.

    2. How can you say that about The Gray Lady?

  5. That spending spike in August 2009, followed by a corresponding drop-off the following month — Was that Cash4Clunkers?

    It’s like the stupidity is frozen in amber for all time.

    1. Spiny, this comment is genius, and should also be frozen in amber for all time!

      “LOOK AT THIS GRAPH, PEOPLE!! NEVER FORGET! NEVER FORGET!!!”

  6. It’s scary and sad how many people accept inflation as a fact of life. As in, stuff getting more expensive is just the natural order of things.

    1. Well, if your low unemployment level depends on inflation (or growth), we better hope it’s a fact of life.

      Not that too much growth is the problem right now.

      1. Having a job doesn’t get you very much if the prices keep rising.

        What would be better is if we had X amount of people unemployed each quarter–but they weren’t the same people. Keep the people moving in and out of work, but not sitting outside of it.

        And I still haven’t figured out (despite having read some on the subject) why unemployment prevent inflation. Anyone know?

      2. Re: Tony,

        Well, if your low unemployment level depends on inflation (or growth), we better hope it’s a fact of life.

        The “low unemployment” one sees during an inflationary bubble is just mainvestment taking resources towards ultimately unsustainable projects. So one may say “low unemployment” depends on inflation, but that’s like saying not feeling your broken leg depends on the morphine.

      3. TONY. Pray tell, what is the mechanism by which employment is supposed to be propped up by inflation? Yes. It’s by decreasing the marginal cost of labor. I.E. Fucking poor people over. Keynesianism, fundamentally, is about screwing the poor. End of story.

      4. Stagflation anyone?

    2. They actually taught us that slight inflation was good for the economy in college(around 1987-1988). I disagreed, but that is irrelevant. Other students accepted it.

      1. They still do (as of fall 2009 anyway).

  7. I can’t tell you how livid I am about QE, which is not only devaluing the currency but also the purposeful suppression of interest rates, both of which penalize savers.

    I can have my savings earn nothing, and thus erode as the currency devalues, or I can throw them into the arena and try to beat the investment banks and the hedge funds at their game. Bernanke and Geithner leave me no real choice. So fuck them.

    They are destroying the financial future of everybody but their Wall Street buttboys.

  8. I don’t understand. I mean, we’ve given people credits so they can buy more house than they can afford, paid them to junk perfectly good cars, paid them to not take a job for years, borrowed billions to create jobs at $372K a job, and created hundreds of new “major” regulations (over $100 million impact) with even more on the way very soon. How is it possible that more wealth is not being created? It’s mind-boggling!

    1. I presume you’re being sarcastic, so I won’t go into why that isn’t actually wealth creation. However, unemployment insurance only lasts a few months (unless you we’re talking about Social Security).

      1. Do you mean to say that the billions in bankers’ bonuses aren’t good for the economy? Wasn’t that created, albeit from thin air.

      2. I think you’re behind the times. It’s been extended to three years.

    2. borrowed billions to create jobs at $372K a job

      Dude, that’s so 2009

      It now costs $857,000 to create or save a job
      http://www.theatlantic.com/bus…..obs/69215/

      1. I was just using the government’s numbers. Yes, they are likely bogus, but they’re good enough to make the point and the usual idiots can’t argue with them.

  9. learned pundits

    They all are.

    Just sayin’

  10. Worst of all, you make a mockery of people who believe thrift is important and like the idea that the dollar is worth something.

    Oooh, did de widdle saver woose a widdle money?

  11. Not to worry you evil savers. We’ll make sure and debase the currency until it collapses so you can still pay your fair share.

  12. We’re just reproducing and educating the wrong way. Read Aldous Huxley’s Brave New World.

  13. This is pitiful.

    The production of consumer goods provides sufficient income to purchase them. It is true that saving, if matched by investment–spending on capital goods, results in greater production in the future and so more consumption in the future, if firms don’t want to invest, saving has no value.

    As for debt, for every debtor there is a creditor. Those paying off their debts need to consume less, but those receiving the debt repayments can consume more.

    Cavanaugh just doesn’t understand basic economics.

    1. “The production of consumer goods provides sufficient income to purchase them.”

      I don’t think you’ll find any economists, on Reason or otherwise, who deny that aggregate expenditures equal aggregate income.

      “It is true that saving, if matched by investment–spending on capital goods, results in greater production in the future and so more consumption in the future, if firms don’t want to invest, saving has no value.”

      The money capital that you give to banks or to financial intermediaries is lent to firms who will spend it on capital, increasing the length of the capital structure. While it is true that some people may keep money stored in bins or in their wallets, this makes up a historically small amount of the monetary base and is not significant. It is true that people tend to hold onto money if they expect a decrease in the price level.

      “As for debt, for every debtor there is a creditor. Those paying off their debts need to consume less, but those receiving the debt repayments can consume more.”

      This is true. Debt is neither good or bad, if it is taken on voluntarily and on ones own volition. The problem is that the federal government is borrowing money on the credit of the taxpayer, which will have to be paid off by stealing money from the public. This is the problem, not private debt, but public.

      “Cavanaugh just doesn’t understand basic economics.”

      I fail to see this.

      1. “As for debt, for every debtor there is a creditor. Those paying off their debts need to consume less, but those receiving the debt repayments can consume more.”

        This is true.

        Only if you borrowed the money from an individual.

        Money is literally created when you borrow money from a bank and that money is destroyed when the loan is repaid.

        Debt is neither good or bad, if it is taken on voluntarily and on ones own volition.

        Wrong again.

        Debt is good if it is used to finance productive investment. It is always bad when it is used to fund consumption.

    2. “if firms don’t want to invest, saving has no value.”

      Not true. Saving has the value of shifting consumption capability from times when it is available in excess to times when it is in short supply. Although this is most helpful for the individual, in aggregate it produces a natural countercylical tendency in the economy.

  14. I remember as a child the story of the little red hen and how she saved her corn for the future and is derided by the other animals, later she is rewarded for storing her corn.

    Now that saving is seen by the majority of governments as an economic evil, I wonder if one day they will push for schools to have anti savings propaganda stories told. In them the little red hen will be the villain and the others animals not storing their corn the new heroes.

    1. And the climax of the story will be all the other animals righteously taking the LRH’s immoral savings and “spreading the wealth around.”

      1. Hopefully they show the part where they all starve to death a week after consuming the hen’s corn. I mean, imagine if we divided up all of Bill Gates’ shit, we’d each have $200 and part of an expensive table or a giant flatscreen. I’m sure that will get us through the winter.

      2. The Little Red Hen needed to give her fair share.

  15. I still haven’t figured out (despite having read some on the subject) why unemployment prevent inflation. Anyone know?

  16. Americans are seeing a steady depletion of what is for most people their highest-ticket asset. They’re also seeing a steady decline in the equity portion of their homes, which has been in almost constant decline since 1983 (when homeowners had about 70 percent equity) and last month fell to an abysmal 42 percent.

    I wonder whether that wasn’t anomalously inflation-driven. Say you were halfway through a 30-year fixed mortgage and had a steady job that was more or less indexed to inflation. Wouldn’t it make sense to pay down your mortgage to zero as soon as possible?

  17. Rational savings is the source of countercyclical pressure in the absence of some sort of centralized economic management scheme — it diverts resources that could be used for immediate consumption in good times, when savings can be afforded, and allows for more consumption during economic downswings.

    A lot of people (tards, that is) tend to throw around consumption/demand as though it is some magical force that causes the economy to grow. Try to get one of them to explain how you wanting some shit and having extra money to spend on it actually creates a job. Consumption constrains/maintains the status quo in an economy, but investment is what lets it grow and adapt.

    Currently, we tax income used for investment harder than consumption, which is terribly counterproductive in the long run. (While we don’t literally tax investment higher, dollars in lower income brackets are going to be directed more towards consumption than investment, what with food and electricity ranking higher as a priority for most people than stocks and bonds. Thus, our heaviest tax rates fall on the dollars most likely to be used for investment).

  18. More dead green shoots Tim?

  19. I have very little respect for “journalists” like you.

    A mass-produced straw-man argument has been crafted contra Keynes implying that, as you said, he somehow wanted the consumer to be a mindless buying machine. That Keynes’ ideas are what ushered in the “consumer culture.”

    Keynes proposed a fiscal stimulus cycle that was counter-cyclical to the business cycle. Meaning that during the trough of a business cycle, governments could target spending to create the jobs that drop off as the Leviathan business cycle throws jobs overboard from the economy. This gives people the jobs that aren’t available and puts the pay check in their pockets *as well as savings accounts,* because savings is just consumption that hasn’t happened yet. The paychecks get spent (following the Marginal Propensity to Consume) and that helps to keep employment up during the recession as well. So all of this spending has potentially kept our economy pretty stable, although still growing slightly less than usual. After the private sector picks up growth and starts recreating many jobs (remember unemployment is a lagging indicator) the public sector does its part and slows down spending to much lower pre-crisis levels, creating a “trough” in the spending cycle which persists until the private sector once again slows down its share of growth as we just saw it do.

    That kind of fiscal policy, though, apparently can’t happen in America for a couple of reasons. First and foremost, and most agreeable I think, is earmarks. Unless we could designate someone to scrutinize every earmark project with a draconian temper, it is basically going to be money down the river, and it stops real recovery from happening both by taking money away from projects that would help boost real economic growth, and by discrediting the entire process when the crappy earmarked projects that were thrown together more last minute than a 3rd graders science project fail, and make the whole process look shit and fail when it can actually work brilliantly.

    The main reason that any of the other arguable faults come from, I think, derive from the buddy-buddy nature of legislation and special interests and lobbying groups. The ideal that capitalism/commercialism has a close cuddly place spooning up against lawmaking is silliness, and it is another reason we waste so much money that could go towards good projects.

    As for the Fed, I cannot defend monetary policy. That is up to Dr. M. Friedman, who believes quite differently than I that the Federal Reserve can do a better job than the method I described at providing jobs. Fed policy relies on the idea that people will take out more credit and loans just because the Fed gives the banks more money to play with. The fact is though Americans have been in tremendous debt and are trying to get out. They don’t want to take out loans and they won’t because they need to pay down debt. This completely undermines the effectiveness of QE, whose power depends on getting money to the peoples pockets through the banking system, which simply doesn’t happen if people aren’t taking out loans/credit.

    So on the Fed note I would say you are dead on, this is obviously the wrong route to take and will not work. You did not seem to properly understand why you were right (somewhat, I guess), but you were right. What we need is less power to the Fed, more regulation on the banks, and more real fiscal-based action on the part of the public sector instead of flimsy and unreliable banking tactics.

    1. Chris, perhaps this debate should be held over at mises.org, but Keynes theory does fundamentally require that the individual be a mindless consumer machine. His theory sounds exactly like a chemistry experiment, i.e. throw in a catalyst (government spending) and voila the chemical reaction (economy) gains heat again.

      Have you ever asked yourself why the jobs are not available in the first place ? And how throwing money at jobs that are actually not wanted by others is firstly unethical and secondly not very efficient.

      1. I am at least glad I could get an expectably shallow and lame response from reason.com

        1. And by the way- if the jobs were actually unwanted as you suppose they are (typical), people would not be averse to spending and there would be no recession- no drop-off in production from the private sector.

          One of my responses got un-nested unfortunately, but it’s below this anyway.

        2. Stop with the patronising attitude, its not shallow, it sums up the essence of Keynes perfectly, if it is shallow then fill in the blanks. You believe that government spending money will lift it out of the recession, no ? This can only work if there is a consumer culture that is ready to start buying as soon a credit is available. no ?

          I studied economics at University, this debate has nothing to do with “meat”, writing a big essay on nonsense neither makes on scholarly nor correct.

          Keynsian economics needs a consumer culture to function period.

  20. That is to say, your response is- as expected- backed up with your un-scholarly and amateur-researched interpretation of a scholar. At least do the folks of us with real opinions a favor and give an actual response that has meat on it, OK?

    1. If you want to make an appeal to authority or show your superior intellect then DO IT !!!! I made the claim that the Keynsian school needs a consumer culture to work, you say no. Do tell why it does not require a consumer culture to function.

      And what exactly makes you an authority on this anyway ? Are you an economics professor or write an economics blog every day, until you can show otherwise you are nothing but a dimwit.

    2. LOL, you’re right, Chris. I’m pretty sure all the real scholars spend their days trying to start pissing contests in the comment threads of Reason articles.

      ROFL, sure, earmarks are getting in the way of the government writing big checks to rescue the economy from the toilet. That’s like saying that the worst team in the NFL could go to the Super Bowl if it weren’t for that damned pesky Gatorade bucket on the sidelines distracting them.

      By all means, please call me an unscholarly amateur, and tell me to go back to my shanty.

  21. Buy non-perishable food. A 2004 Pentagon study said that after 2010, wars would be fought over food and water.

  22. This plan has no merit

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