An article by Jeffrey Strain (www.thestreet.com) January 15 2008, on “why you’re not saving enough, here’s why” pointed out that the US savings rate for November 2007as a proportion of disposable income was a negative 0.5 per cent.
This compared with a meagre positive savings rate of 1.8 per cent in 2004, and by contrast, a healthy 4.8 per cent savings rate in 1994, and a robust 10.8 per cent savings rate in 1984.
Stephen Roach, the chairman of Morgan Stanley Asia (“America’s inflated asset prices must fall” Financial Times January 7 2008) says that the chronic shortage in domestic saving has a compounded impact, with a record 133 per cent of disposable personal income going into household debt.
Why is America going backward? True, the rest of the world is happy to run large savings surpluses to America in return for US securities, US equities, US companies, US real estate.
Citigroup, America’s largest bank by asset size and Merrill Lynch, America’s largest stockbroker are very dependent on foreign state-backed sovereign wealth funds for substantial equity injections to keep them afloat. Yet American politicians go out of their way to be suspicious about the motives of these sovereign funds. But as Stephen Roach points out, for a saving-short nation “can beggars really afford to be so choosy.”
As the statistics on savings showed, the shortfall in household savings started in the 1980s, fuelled by the deregulation of banking in the 1970s and 1980s, which encouraged a large wave of bank consolidation. Along with the collapse of savings and loan institutions in the 1980s, bank lending restrictions were eased which encouraged more consumer spending at the expense of saving.
Baby boomer homeowners (born between 1948 and 1964) began to cash in part of the equity in their homes in exchange for additional spending on personal consumption. Along with the fall in interest rates following the brief recession in 2000, the long bull run in the stock markets, and the bubble in house prices allowed home owners to cash in substantial capital gains for even greater consumption levels. The beginning of the end came in calendar 2007, when private consumption reached a record 72 per cent of (inflation adjusted) gross domestic product.
With the economic tide now moving against America in falling house prices, weak employment levels, and near recessionary conditions, the outlook is highly uncertain with the likelihood of being in one of the most severe market corrections in living memory. The people most affected are the Gen X-ers (born between 1964 and 1982), and Gen Y-ers, (born between 1982 and 2000). Many Gen Xers have fallen so far behind in their mortgage repayments as to losing their homes entirely.
The older Gen Y-ers are burdened with large student debts, which will take many years to repay, and with many Y-ers, who have started their own businesses, the times are getting tougher, with the availability of credit becoming very rationed, as the international credit markets are in a tight squeeze – see Been Around The Block for an enlightened commentary.
The moral of the darkening economic climate is to resolve to go back to older times when people saved rather than spent all their disposable income. You need to resolve to save at least 10 per cent of your after tax income if you want to have some financial independence in later life. It’s never too late to start.
This report is presented by Scrooge in the interests of enhancing your financial wellbeing.