{"id":495621,"date":"2010-03-31T13:25:23","date_gmt":"2010-03-31T17:25:23","guid":{"rendered":"http:\/\/www.businessinsider.com\/three-potential-explanations-for-the-continued-fall-in-us-savings-rate-2010-3"},"modified":"2010-03-31T13:25:23","modified_gmt":"2010-03-31T17:25:23","slug":"three-potential-explanations-for-the-continued-fall-in-us-savings-rate","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/495621","title":{"rendered":"Three Potential Explanations For The Continued Fall In US Savings Rate"},"content":{"rendered":"<p><em>(This post appeared at <a href=\"http:\/\/www.creditwritedowns.com\/2010\/03\/three-potential-explanations-for-the-continued-fall-in-us-savings-rate.html?utm_source=feedburner&amp;utm_medium=feed&amp;utm_campaign=Feed%3A+creditwritedowns+%28Credit+Writedowns%29\">Credit Writedowns<\/a>.)<\/em><\/p>\n<p>I have been tracking the <a href=\"http:\/\/www.creditwritedowns.com\/2010\/03\/three-potential-explanations-for-the-continued-fall-in-us-savings-rate.html?utm_source=feedburner&amp;utm_medium=feed&amp;utm_campaign=Feed%3A+creditwritedowns+%28Credit+Writedowns%29#\" >savings<\/a> rate on this  blog for some time.&nbsp; What has been obvious to me and other observers is  that the U.S. has had a declining savings rate since the secular bull  market in bonds and shares began in the early 1980s. Indeed, it seems  likely that there is a correlation between asset prices and savings  rates in the United States.<\/p>\n<p>However, we have now experienced a  spectacular bust in asset prices. Many pundits including myself expect a  secular shift away from consumption toward saving.&nbsp; However, the data  do not show this shift.&nbsp; In fact, after peaking this past Spring at  6.4%, savings rates have <a href=\"http:\/\/www.creditwritedowns.com\/2010\/03\/americans-are-now-back-to-the-overconsumption-norm.html\">plummeted  to 3.1%<\/a> in the last month. What gives?<\/p>\n<p>Well for one, asset  prices have skyrocketed since then. And it does seem that the prior  correlation between asset price increases and low savings rate is  intact. This has been the conclusion I draw.&nbsp; However, I want to offer  up a few other possibilities and make a few conclusions about low income  growth and industrial policy.<\/p>\n<p>Here are the three possibilities I  have come across. (If you have any other thoughts, please add them in  the comments):<\/p>\n<ol>\n<li>Asset prices are increasing. The wealth effect  and the decrease in debt-related stress associated with this increase  has allowed consumers to resume their prior consumption patterns. This  is where I have focused in the past.<\/li>\n<li>Debt-related stress is  still acute, particularly because of continued high rates of  unemployment. This has caused consumers to draw down savings in order  meet basic material needs.<\/li>\n<li>A surge in strategic defaults has  left consumers with more money to spend and is boosting retail sales.<\/li>\n<\/ol>\n<h3><a href=\"http:\/\/feedproxy.google.com\/three-potential-explanations-for-the-continued-fall-in-us-savings-rate-2010-3\/1-a-strong-recovery-has-allowed-consumers-to-resume-their-prior-consumption-patterns-1\">Let&rsquo;s  go through each of these &gt;&gt;<\/a><\/h3>\n<p><b>See Also:<\/b><\/p>\n<ul>\n<li><a href=\"http:\/\/www.businessinsider.com\/heres-10-reasons-to-bet-against-a-recovery-2010-2\">Here&#8217;s 10 Reasons To Bet Against A Recovery<\/a><\/li>\n<li><a href=\"http:\/\/www.businessinsider.com\/why-theres-no-way-the-government-can-tighten-and-risk-the-double-dip-2010-3\">Why There&#8217;s No Way The Government Can Tighten And Risk The Double Dip<\/a><\/li>\n<\/ul>\n<h2>1. A strong recovery has allowed consumers to resume their prior consumption patterns<\/h2>\n<p>The asset-based theory of low savings is at the centre of my own  writings here. I first broached this in <a href=\"http:\/\/www.creditwritedowns.com\/2008\/03\/us-economy-2008.html\">The  US Economy 2008<\/a>, a post which accurately predicted both the economic  turmoil we have witnessed and the lack of political will as well as the  burgeoning protectionist acrimony now at play.<\/p>\n<p>All of this is the  consequence of an industrial economic policy in the US which is  predicated simultaneously on suppression of domestic wage growth and on  consumption growth in order to boost corporate profits and increase  asset prices. These two goals are at odds with one another and naturally  lead to the accumulation of debt.<\/p>\n<p>When the business cycle reaches  its apex, the weight of these debt burdens becomes too heavy and we end  up in recession. Interest rates are cut too low in order to resume the  asset-based dynamic. But, what follows is a jobless recovery because, as  I indicated, the goal is to increase corporate profitability and this  is very much dependent on suppressing wage growth.<\/p>\n<p>At some point  after rates are cut to zero, this cycle must end with the US economy  collapsing under the dead weight of the debt accumulation. But the cycle  can continue indefinitely until then.<\/p>\n<p><\/p>\n<h2>2. Debt stress has forced people to draw down on savings to meet basic needs<\/h2>\n<p><div class=\"image-container slide-image\"><img decoding=\"async\" src=\"http:\/\/static.businessinsider.com\/image\/4bb37f597f8b9a6905ec0600-400-300\/2-debt-stress-has-forced-people-to-draw-down-on-savings-to-meet-basic-needs.jpg\" alt=\"2. Debt stress has forced people to draw down on savings to meet basic needs\" border=\"0\" class=\"slide-image\" \/><\/div>\n<p>But then there is debt stress. I see this stress as mainly  mortgage-related. In the 1930s, the savings rate went negative when  things were at their worst.<\/p>\n<p>Last October I took <a href=\"http:\/\/www.creditwritedowns.com\/2009\/10\/a-brief-look-at-the-asset-based-economy-at-economic-turns.html\">a  brief look at the Asset-Based Economy at economic turns<\/a> to see what  debt burdens looked like across different sectors of the economy and  how they responded to recessions and recoveries. What was clear to me is  that, in the household sector &ndash; where most of the end consumption lies,  it is mortgage-related debt which is the key stressor.<\/p>\n<p>So, it seems logical that the massive decline in house prices of  about 30% nationwide has created enough debt stress that some have had  to dip into savings in order to meet their obligations. Certainly this  is why Bill Gross&rsquo; formula for recovery in early 2009 was to &#8220;<a href=\"http:\/\/www.creditwritedowns.com\/2009\/01\/bill-gross-stop-the-decline-in-asset-prices.html\">stop  the decline in asset prices<\/a>.&#8221; It does seem that this has also been  the purpose of the Obama Administration&rsquo;s economic policy and bailouts  all along (see &#8220;<a href=\"http:\/\/www.creditwritedowns.com\/2009\/03\/its-the-writedowns-stupid.html\">It&rsquo;s  the writedowns, stupid<\/a>&#8220;).<\/p>\n<p>Now, if the Obama Administration  and the Federal Reserve have been successful in reviving asset prices,  then you would expect retail sales to be increasing. <a href=\"http:\/\/www.creditwritedowns.com\/2010\/03\/retail-sales-much-stronger-than-expected.html\">They  are<\/a>. So, it seems like increased consumption is leading to  decreased savings. This doesn&rsquo;t sound like debt stress.&nbsp; If anyone has  counterfactuals, please provide them.<\/p>\n<p><\/p>\n<h2>3. Strategic defaults have left consumers with more money to spend and is boosting retail sales.<\/h2>\n<p><div class=\"image-container slide-image\"><img decoding=\"async\" src=\"http:\/\/static.businessinsider.com\/image\/4bb380017f8b9a8f0d9b0100-400-300\/3-strategic-defaults-have-left-consumers-with-more-money-to-spend-and-is-boosting-retail-sales.jpg\" alt=\"3. Strategic defaults have left consumers with more money to spend and is boosting retail sales.\" border=\"0\" class=\"slide-image\" \/><\/div>\n<p>The  last bit is something I got from a reader at Seeking Alpha. It is an  interesting theory.&nbsp; He says:<\/p>\n<blockquote>\n<p>Ed,<\/p>\n<p>The recent  boost to retail sales could have come from a surge in Strategic  Defaults. A recent article by Old Trader documented that for every  foreclosed house on the market another 5-6 houses are in strategic  default.<\/p>\n<p>Assuming their mortgage was the single largest expense in  their budget, they suddenly have a lot more spendable money. That  additional spending money could account for both the recent drop in credit care  delinquencies as well as a recent uptick in retail sales.<\/p>\n<\/blockquote>\n<p>His  thoughts certainly dovetail with the increase in retail sales.  Moreover, his contention that retail sales increase when defaulting on a  mortgage and relieving the debt stress of the greatest expense a  household has.<\/p>\n<p>You can read my post &#8220;<a href=\"http:\/\/www.creditwritedowns.com\/2010\/03\/strategic-default-in-come-the-waves-again.html\">Strategic  default: In come the waves again<\/a>&#8221; for more on strategic defaults.  But, the long and short of it is that house prices have not reverted to  mean. They are still well above their trend line and the rise in  consumer price inflation. It makes sense for people, years after a large  decline in prices has begun, to default, knowing that they can save by  renting for much less.<\/p>\n<p>I believe strategic defaults will increase as Alt-A and prime loans  reset.&nbsp; However, this raises the prospect that banks will start pursuing  recourse on these loans. My recent post &#8220;<a href=\"http:\/\/www.creditwritedowns.com\/2010\/03\/do-non-recourse-loans-become-recourse-in-the-new-mortgage-plan.html\">Do  non-recourse loans become recourse in the new mortgage plan?<\/a>&#8221;  elicited some interesting comments by readers following the strategic  default situation.<\/p>\n<p>Tom Lindmark, who writes the blog <a href=\"http:\/\/www.butthenwhat.com\/\" >But Then What<\/a>, said:<\/p>\n<blockquote>\n<p>Since  mortgages are governed by state law, I don&rsquo;t think that it is possible  to make a blanket statement as to whether they may or may not be subject  to deficiency judgments in the event of modification. I&rsquo;ve had several  conversations with attorneys over the statutes in <br \/>Arizona on various  occasions and the bottom line has always been to forget about trying to  recover anything over and above the value of the property if you&rsquo;re  foreclosing on residential real estate.<\/p>\n<p>Here&rsquo;s a link (<a href=\"http:\/\/www.sackstierney.com\/articles\/antideficiency.htm\" >http:\/\/www.sackstierney.com\/articles\/antidefici&hellip;<\/a>)  to a decent article on the Arizona statutes. Notice how a simple  concept gets really complicated really fast. You may note that the  article implies that a refinance may not enjoy anti-deficiency  protection. It fails to reference an Arizona court decision that many  feel extends protection to refinance transactions. I don&rsquo;t have that  link readily available but if I can find it again I will send it to you.<\/p>\n<p>I  think that the bottom line on this one is that the banks probably don&rsquo;t  want any part of jumping through the hoops that would be required to  obtain deficiency judgments. Putting aside the bad publicity, the  expense and complexity of trying to wring blood out of very dry stones  probably isn&rsquo;t worth it.<\/p>\n<\/blockquote>\n<p>Another reader challenged  the concept that banks will not pursue strategic defaulters, writing:<\/p>\n<blockquote>\n<p>In  Florida they can come after all loans even 1st mortgages and they have  started doing so on some shocked people and some were even short sells  where a professional didn&rsquo;t verify there was no recourse for the banks  for the difference.<\/p>\n<p>Probably, rumor in Florida is that the banks  are starting to look at the person&rsquo;s <a href=\"http:\/\/www.creditwritedowns.com\/2010\/03\/three-potential-explanations-for-the-continued-fall-in-us-savings-rate.html?utm_source=feedburner&amp;utm_medium=feed&amp;utm_campaign=Feed%3A+creditwritedowns+%28Credit+Writedowns%29#\" >credit report<\/a> besides the foreclosure and their job listed to see if they are a good  target to collect something on. Wouldn&rsquo;t be surprised if they start  selling the ones that don&rsquo;t look as good to collection firms.<\/p>\n<p><a href=\"http:\/\/www.housingwire.com\/2010\/01\/28\/lenders-pursue-mortgage-payoffs-long-after-homeowners-default\/\" >http:\/\/www.housingwire.com\/2010\/01\/28\/lenders-p&hellip;<\/a> <br \/>&#8220;When John King stopped making payments on his home in Coral  Gables, Florida, two years ago, he assumed the foreclosure ended his  mortgage contract, he said. Last month, a Miami-Dade County court gave  collectors permission to pursue him for $44,000 stemming from the  default.<\/p>\n<p>King is among a rising number of borrowers who are  learning that they can be on the hook for years after losing their  homes. Amid a crisis that stripped $6.4 trillion, or 28 percent, from  the value of U.S. residential real estate since the 2006 peak, lenders  are exercising their rights to pursue unpaid mortgage balances. To get  their money, they can seize wages, tap bank accounts and put liens on  other assets held by debtors.&#8221;<\/p>\n<\/blockquote>\n<p>The bottom line in  this for me is that, to the degree strategic defaults are increasing  retail sales, this is unsustainable. Eventually, banks will take every  recourse they can to pursue these defaulters because the losses from  these loans is going to mount.<\/p>\n<p><\/p>\n<h2>Conclusion: American is still living beyond its means<\/h2>\n<p><div class=\"image-container slide-image\"><img decoding=\"async\" src=\"http:\/\/static.businessinsider.com\/image\/4bad1de67f8b9a37750e0000-400-300\/conclusion-american-is-still-living-beyond-its-means.jpg\" alt=\"Conclusion: American is still living beyond its means\" border=\"0\" class=\"slide-image\" \/><\/p>\n<p class=\"caption\">Eating ice cream in Scottsdale<\/p>\n<\/div>\n<p>Note that some pundits believe the data are inaccurate and that the  decline has been nowhere as large as the data now indicate. Time will  tell. I take the line that America has been living beyond its means.  When the housing bubble burst it was game over. Policy can reflate the  economy temporarily. And savings rates have declined as a result. But  the secular trend is clear. <a href=\"http:\/\/www.creditwritedowns.com\/2009\/08\/weak-consumer-spending-will-last-for-years.html\">Weak  consumer spending will last for years<\/a>.<\/p>\n<p>People like <a href=\"http:\/\/www.creditwritedowns.com\/2008\/11\/stephen-roach-americans-abandonment-of-overconsumption-is-a-good-thing.html\">Stephen  Roach opined back in November 2008<\/a> that this was a good thing. I  agree.&nbsp; Yet, some are attempting to shift the blame for America&rsquo;s  problems onto other people, mostly the Chinese. As Roach wrote in the FT  the other day <a href=\"http:\/\/www.creditwritedowns.com\/2010\/03\/roach-gd-ii-awaits-if-china-bashing-rhetoric-turns-into-protectionism.html\">GD  II awaits if China bashing rhetoric turns into protectionism<\/a>.  America needs to take responsibility for its own economic <a href=\"http:\/\/www.creditwritedowns.com\/2010\/03\/three-potential-explanations-for-the-continued-fall-in-us-savings-rate.html?utm_source=feedburner&amp;utm_medium=feed&amp;utm_campaign=Feed%3A+creditwritedowns+%28Credit+Writedowns%29#\" >policies<\/a>. <a href=\"http:\/\/www.creditwritedowns.com\/2010\/03\/three-reasons-analysts-have-rose-coloured-glasses-on-chinese-bubble.html\">China  has its own problems<\/a>. Let them focus on these. Blaming others for a  problem made in America is not going to solve anything.<\/p>\n<p>Nevertheless,  in my view, it is clear in part why Americans have over-consumed. I  alluded to this in my recent post on overconsumption:<\/p>\n<blockquote>\n<p>The  challenge the US faces is how to maintain consumption growth in the  face of continuing pressure on income. Businesses are enjoying a huge  resurgence in profit and this has contributed to their savings and low  debt levels. Yet, households remain indebted. Moreover, after the 2009  stimulus shot in the arm, disposable personal income is not going  anywhere.<\/p>\n<p>Unless US policymakers solve this problem &ndash; the  divergence in the benefits of economic policy for business and  households, consumption growth will have to slow. If consumption does  slow and asset prices stall, the US will be headed back into recession.<\/p>\n<\/blockquote>\n<p>Put  more directly: At the heart of America&rsquo;s problems is an economic policy  which is designed to keep wages down but consumption up. That  necessarily means more bubbles, more debt, more wealth and income  inequality, and consequently more strife and social unrest when the  gravy train ends.&nbsp; You cannot expect to hollow out a country&rsquo;s  manufacturing base, set up a bunch of McJobs to replace it, and still  have consumers spend to support the economy.&nbsp; This is what we are now  starting to realize.<\/p>\n<p>Inevitably, given human nature, people start  looking out for themselves when their basic needs are not being met.&nbsp;  That is what my <a href=\"http:\/\/www.creditwritedowns.com\/2010\/03\/the-politicization-of-economic-problems.html\">The  politicization of economic problems<\/a> post was about.<\/p>\n<p>We can  sit here and laugh at Marc Faber and his media-seeking hyperbole about  how this whole thing is destined to end in collapse. However, he has a  very far-sighted view of what is transpiring. Unless policy makers  change their tune and understand that a rebalancing is in order, we are  going to be in a world of trouble.&nbsp;<\/p>\n<p>What we need are leaders who  understand that, in an environment when the most basic needs on the  hierarchy of needs are under threat, people will react with fear, anger  and irrationality. Playing the blame game and pointing fingers will only  yield unpredictable results. Rather, American policy makers should  focus on the longer-term goal of increasing household income and  savings. Unfortunately, this can only be done via higher interest rates  and concentrated industrial policy focused on increasing wages instead  of suppressing them.<\/p>\n<p><a href=\"http:\/\/www.businessinsider.com\/three-potential-explanations-for-the-continued-fall-in-us-savings-rate-2010-3#comments\">Join the conversation about this story &#187;<\/a><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~r\/TheMoneyGame\/~4\/GDEiEYl-ATY\" height=\"1\" width=\"1\"\/><\/p>\n","protected":false},"excerpt":{"rendered":"<p>(This post appeared at Credit Writedowns.) I have been tracking the savings rate on this blog for some time.&nbsp; What has been obvious to me and other observers is that the U.S. has had a declining savings rate since the secular bull market in bonds and shares began in the early 1980s. Indeed, it seems [&hellip;]<\/p>\n","protected":false},"author":6560,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-495621","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/495621","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/6560"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=495621"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/495621\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=495621"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=495621"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=495621"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}