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.