Monetary Policy

SaveWrong: America's Nest Eggs Broken

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Last week I gave a huzzah and a cheerio to the nation's born-again savers. But the Wall Street Journal's Mark Whitehouse comes up with some alternative numbers that suggest those savers are actually still spending like drunken sailors:

Over the two years ending September 2010, Americans withdrew a net $311 billion — or about 1.4% of their disposable income — from their savings and investment accounts, according to the Federal Reserve. That's a sharp divergence from the previous 57 years, during which they never made a net quarterly withdrawal. Rather, they added an average of 12% of disposable income to their holdings of financial assets — including bank accounts, money-market funds, stocks, bonds and other investments — each year.

Nobody saves.

Bureau of Economic Analysis data (which I have been using) show savings rates up from about 2 percent to about 6 percent since the beginning of the recession. Where is the discrepancy coming from? The BEA figure calculates disposable personal income less personal expenditures. The Journal's numbers (credited to the Federal Reserve, though I haven't located the source) show how much people are putting into (or in this case taking out of) savings and investment vehicles. In one respect measuring nest eggs is clearly a more relevant gauge of how seriously people are socking money away. On the other hand, interest rates for most standard investments are so low it's not surprising to see unspent money going elsewhere.

Where is it going? My guess is that the newsy explanation is only partially correct. While some part of this reversal comes from people dipping into their savings to keep food on the table, it's also likely that a big portion of this cash is going to pay down debt. Whitehouse notes that between 2008 and 2010, consumers reduced mortgage and other debt by a cool billion. Much of that has come through defaults, and it isn't a very impressive return for $311 billion. But credit reduction is for real. Household debt has been dropping for about three years now, according to the Fed's Flow of Funds report for the third quarter of 2010:

This is more than most people's life savings.

Household debt contracted at an annual rate of 1¾ percent in the third quarter, the tenth consecutive quarterly decline. Home mortgage debt fell at an annual rate of 2½ percent in the third quarter, about the same as in the previous quarter. Consumer credit was down 1½ percent, after a decline of 3¼ in the previous quarter.

This could also be the tip of the boomer-retirement iceberg. Most Americans under the age of 50 have been raised on terrifying tales of the havoc that would result once all those damn hippies started pulling money out of their savings accounts and 401(k)s. I don't know that the chart above is that event, but it's what that event will look like. And whenever it happens, low interest rates won't help.

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  1. From where I stand, reduction of household debt is saving.

    1. But is reduction of net household debt? I.e., if your house value increases, so that you have equity, your household debt decreases by one measure.

      Different metrics that look at those differently will get enormously different answers for saving.

      Heck, with some house prices and low mortgage home equity lines (and interest deductions), it can be worth it for people to take out money from their house in order to put into investment vehicles.

      1. Uh…if your house’s value increases…that doesn’t mean your debt has decreased…

        For example…two neighbors who owe $80k on their homes…although one is worth more if sold…still owe 80k in debt…

        …its the same principle as both of us owing 10k on credit cards, even though you make twice as much as i do…

        …you don’t realize a debt reduction until you actually sell your house…

        1. Uh…if your house’s value increases…that doesn’t mean your debt has decreased…

          So we see that you’re a big opponent of “mark to market,” then.

          It doesn’t mean that your debt has decreased in one real sense until you realize those gains, but many measurements of household debt measure “value of assets minus value of liabilities,” and under that measure, yes, it would reduce your debt.

          My whole point was that one thing that causes these different measurements of “savings” and “household debt” to disagree so dramatically is how they count added equity in your house; i.e., whether it’s an asset that increases your net worth and decreases your net household debt.

  2. Hmmm…reduction of mortgage debt by 2.5% annually. At that amount (rate would grow), all current mortgage debt would be paid off in 39 years (40 including this one).

    Considering most people have 30 year mortgages max (I know there are some 40 and 50, but also plenty of 20 and 15), that seems low.

    /18 years, 4 months to go

    1. Okay, did the math on a 30 year mortgage at 5%. At that interest rate, you are paying off 2.5% annually at month 93.

      At 6%, month 112.

      So not really as bad as I thought, the “average” is further into their mortgage than I would have guessed. I know it takes a long while before the principle starts adding up, but everytime I play with a table, it always surprises me.

      1. And for fun, at 8%, month 141. But if you have an 8% mortgage AND have kept up to date for nearly 12 years, you should have refinanced well before now.

    2. Hmmm…reduction of mortgage debt by 2.5% annually. At that amount (rate would grow), all current mortgage debt would be paid off in 39 years (40 including this one).

      Only if no mortgages are made during that time. The 2.5% figure is net of new mortgage debt issuance, so in the long run it should reflect home price de/appreciation and interest rate levels more than -3.33% (-1/30).

      Also, most people tend to sell their house or refinance before the mortgage is paid in full — moving to a nicer neighborhood, a smaller place after the kids leave, a new job, etc. And, importantly, most early mortgage payments don’t pay much principal off. I guess you’ve already figured as much, but there’s a nice little monthly payment breakdown chart here. (Fun fact: Interest-only mortgages help maximize your mortgage interest tax deduction. Get yours today.)

      In other words, there are a lot of factors to consider that might move the needle a bit in a stable home price environment. But, for the most part, the low interest rates we have right now encourage people to take on more mortgage debt and refinance into plans that amortize principal more slowly, so that -2.5% figure shows a pretty real contraction.

      Also, for what it’s worth, most of that cutting is due to default not thrift. It’s not people paying off their mortgages faster than others can take on the debt.

  3. Watch out, Tim is bringing out his Lost In America clips!

    1. that lady was in 2081!

  4. deeeeflation.

  5. My warning meant nothing
    You’re dancing in quicksand

    1. I hope it sucks you …

  6. So why is there no post on mayor Bloomberger’s call for tighter background checks on gun buying?

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  8. In have seen the future, it is a bald headed man from New York.

  9. Are you cutting back on the mascara, Tim?

  10. Economic downturn is the worst time to convert to saving, but it’s great time to have been saving during the boom.

  11. OK, too weird. I was just talking with my boss about Lost in America today. Somehow, we got on Albert Brooks movies.

    GET OUT OF MY BRAIN CAVANAUGH!

  12. Consumer debt has been falling for a couple of years. Some of that is coming from decreased spending but some of it comes as well from pulling down savings. We’re selling our MBS to pay down our mortgage.

  13. It’s too weird to know it. I don’t support it, sorry

  14. Just want to make sure we all realize that if everyone does more of this “responsible savings” (with no offset from other actors) it will cripple the economy, lead to more unemployment, and deflation…

    …this is a good thing?

    It is actually a large part of why we haven’t had a recovery for the gross majority of us…

    1. You say “deflation” like its a bad thing. Have you possibly considered that perhaps deflation needs to occur? Or would you rather see people take out $600K loans for a 1000 square foot house and another $150K for a four-year degree?

      1. You realize its not just deflation of prices, but deflation of wages too? You don’t get to keep your 100k job and pay $2 for a year of school…doesn’t work that way…

        Ask japan how that deflation thing has been working out for them…

        PS. I’m a progressive, so i think college education should be free like in finland, denmark, etc…150k for a 4 year degree is stupid, inefficient, etc…

        1. You’re a progressive, so you think having other people pay for something for you means it’s free.

        2. Please, I live and work in Japan. If Japan had just taken its pain 20 years ago instead of stringing along zombie banks for five years, gradually bailing them out for another five, subsidizing the export economy with an artificially weak currency, building bridges to nowhere and taking on 200% of their GDP in debt, you wouldn’t see the structural imbalances they have today that have led to such stagnation. And it’s all in pursuit of GDP growth, which when gamed is a poor approximation of real wealth increases. If anything, deflation is coincident with many issues that lead to poor economic performance, but that doesn’t mean it should be combated at the expense of other, more significant factors.

          All of the arguments against saving during a recessionary environment are just as applicable in a growth environment. If saving in a recession lessens production and costs jobs, and those effects are amplified, it does so in a boom, too. If letting your credit card balance increase is a bad idea in a boom, so it is in a bust. If buying shit for its own sake is an Bad practices don’t suddenly become good depending on a nominal GDP target, which itself measures activity rather than true increases in wellbeing.

          PS. I’m a progressive, so i think college education should be free like in finland, denmark, etc…150k for a 4 year degree is stupid, inefficient, etc…

          Derp.

          Also, wages are sticky and deflation increases the real value of savings. If inflation helps debtors then deflation helps creditors. Only high levels of deflation — which Japan has never experienced, by the way — have an enormous impact on lending and economic calculation, and the same is true for inflation in any case.

  15. But credit reduction is for real. Household debt has been dropping for about three years now,

    Big time. Non-revolving credit, i.e. credit cards, has been declining since April 2008, and going negative since the beginning of 2009. Non-revolving credit, i.e., mortgages, was also negative up until October of this year, but that’s only because people borrowed over $31 billion for student loans (including fools who already had a shit-ton of that particular debt to begin with), which pushed it into “positive” territory.

    The savings rate has dropped a little bit from its “OMG WE’RE HOSED” days, but not by much, and it’s not going back to the sub 2% levels of the housing bubble years for a while.

  16. “Non-revolving credit, i.e. credit cards”

    That should have said “revolving”

  17. “Whitehouse notes that between 2008 and 2010, consumers reduced mortgage and other debt by a cool billion.”

    Surely you mean trillion?

  18. I’m a saver. I’m buying a new car this week, first one in 10 years. Cash. Paying THE SAME amount for the same model. Not sure how much longer prices are going to stay down because that is one supply that can be cut relatively quickly, unlike housing supply. Of course, the makers haven’t cut supply yet, but the number of dealers is down and they are still worried about unsold inventory, maybe even more worried than a few years ago when there were more dealers.

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