Monday, June 29, 2009

Some excellent news

One piece of excellent news is that the savings rate in the US hit 6.9% in May, the highest since 1994. The savings rate has now rebounded from under 1% in 2007 and early 2008. The May rate was artificially inflated by stimulus from President Obama, but nonetheless, the savings rate has been trending higher over the past year. The savings rate and incomes rose while consumer spending was basically flat.

In the 1970s, the savings rate ranged from 8-12%. Credit cards were in their infancy and mortgages were relatively small (due in part to high interest rates).

In the 1980s, as interest rates dropped and the boomers were in their heydey, the savings rate dropped under 8%.

In the 1990s, as the stock market bubble developed, the savings rate dropped from 8% to 2%.

In the 2000s, the housing bubble finished off savings, which went to about 0%.

It is likely that the savings rate will drop a few percentage points once the stimulus wears off but I believe that we are heading to a permanent 10-15% savings rate over the next few years and it will last for the next decade at least. The faster we get there, the better in my humble opinion.

The fact that almost all of the stimulus was saved by US households tells us that there has been a sea change in attitude by US consumers. If they receive an extra dollar, they are saving it as opposed to spending it. That tells us two things:

1) When the Obama direct stimulus wears off later in 2009, consumer spending may fall further if it has been cushioned or improved even slightly by this stimulus.

2) It is hinting that as time goes on, the savings rate will continue to go up, given the sea change in attitude.

Now, all this flies in the face of the "green shooters" who feel that consumer spending will start to rise later in 2009. The only way that consumer spending, which is the lifeblood of the US economy, can recover is through job creation (nope), higher wages (nope) or less saving. The green shooters and all these Canadian bank economists who project a return to spending in the second half (as if this was all a bad dream) are dismissing this rise in savings as a temporary response to the stock and real estate market declines.

I am saying that this increase in savings is a long term phenomenon. In the short term, the rise from 0% to mid single digits is killing the retail and consumer based portions of the economy. The rise in the savings rate of almost 5% in one year is creating havoc in the economy. One man's savings is another man's income (the paradox of thrift popularized by Keynes).

Households are finally realizing that their stock, housing and pension assets were inflated and are rationally cutting unnecessary spending to build savings and reduce debt. The retirement age population is going to soar in the coming decade, due to the early baby boomers reaching 65 soon, and sadly, many have little savings. This realization is likely going to continue for years and possibly decades.

Savings need to be rebuilt for a sustainable and healthy economy and the good news is that the secular change in the private sector is well underway. Hopefully, governments will quit tampering so much with the extinguishing of debt. Governments are socializing the debt by running massive deficits and transfer private sector debt to the government (Fannie/Freddie, Citi, Bear Stearns, GM, TARP, mortgage security buyouts, etc...). I suspect that the public sector will also go through a sea change, forced by the bond market, in the coming years as well.

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