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Posted by warren mosler (65.113.90.18) on 20:47:36 03/29/05
In Reply to: Malpass' WSJ comments re personal savings posted by George R.
: Warren....comments please on Malpass' comments...thanks
> What do you think of this Warren ?
COMMENTS I CAPS:
Running on Empty?
By DAVID MALPASS
March 28, 2005; Page A16
With each hike in interest rates, those predicting a
bad ending to the 40-month U.S. expansion look
expectantly for consumer spending to flag. One of
their main worries is the premise that we will run out
of savings, especially if foreigners pull the plug or
asset prices fall. The reality is that the U.S. has
the world's biggest accumulation of savings and
investments.
YES, AT TODAY'S MARKET PRICES WE CERTAINLY DO! AS
DEFINED ABOVE, SAVINGS IS THE ACCOUNTING RECORD OF
INVESTMENT.
The U.S. household sector, the world's largest net
creditor, is favorably positioned for higher rates due
to large liquid assets and the generally fixed-rate
U.S. mortgage structure.
YES, BUT WON'T BE ABLE TO CONTINUE IT'S CREDIT
EXPANSION INDEFINATELY AS DEBT SERVICE TO INCOME
CONTINUES TO NEED TO CLIMB TO SUSTAIN EMPLOYMENT AND
GROWTH.
Of course, more saving would be better especially for
those who haven't been able to save, and a reduction
in the tax distortions that penalize liquid savings
while favoring real estate would add to our growth
prospects.
ACTUALLY, THAT MIGHT CUT DEMAND, BUT THAT'S ANOTHER
STORY.
However, the bigger harm is not that we expose
ourselves to a collapse, but that we allow ourselves
and foreigners to underestimate, even mock, our
economic system. We apologize for our "low savings
rate" and "dependence on foreigners," turn our foreign
economic policy over to the International Monetary
Fund's economic gurus, and contemplate consumption tax
increases, forced saving, protectionism, and a weaker
dollar (with the consequent increase in inflation).
AGREED WITH MOST OF THAT, BUT PROBABLY FOR VERY
DIFFERENT REASONS.
Instead, while working hard to improve our system, we
should encourage others to emulate its freedom,
flexibility and prosperity.
* * *
Not only are we not running out of household savings,
it is growing fast both in terms of the annual
additions and the cumulative buildup of American-owned
savings. Household net worth, one good measure of
savings, reached $48.5 trillion in 2004.
THAT'S MORE THAN JUST FINANCIAL ASSETS. SEEMS THAT
INCLUDES HOME EQUITY AND OTHER NET 'REAL' ASSETS AT
MARKET PRICES, ETC.
Time deposits and savings accounts alone total a
staggering $4.3 trillion, versus slow-growing
credit-card debt of $800 billion.
YES, BUT THE ONLY NET FINANCIAL ASSETS OF THE NON GOVT
SECTOR ARE THE GOVT SECS OUTSTANDING, CASH IN
CIRCULATION AND RESERVES AT THE FED. ALL DEPOSITS
WERE 'BORROWED INTO BEING'
True, the U.S. is the world's biggest debtor, but it
is building assets faster than debt.
AGAIN, REAL ASSETS.
Even if household assets took a hard fall, the
remaining net worth would still dwarf other
countries'. On a per capita basis, counting mortgages
but not houses, net financial assets total $89,800 in
the U.S. versus $76,900 in No. 2 saver, Japan.
THIS PROBABLY INCLUDES IMPLIED PENSION FUND BENEFITS,
INCLUDING THE PRESENT VALUE OF GOVT PENSION FUNDS,
WHICH WAS ADDED TO SAVINGS CALCULATIONS A FEW YEARS
BACK. ALSO, UNDERFUNDING OF PRIVATE PENSIONS MAY NOT
BE INCLUDED. DON'T KNOW.
Of course, some households don't have nearly this
average, creating risks for them and burdens on others
in the event of a downturn. This is an appropriate
policy concern, but the macroeconomic issue is
aggregate savings, of which the U.S. has an abundance.
NOT NET FINANCIAL ASSETS IN TOTAL. WITH A 3% GOVT
DEFICIT AND A 6% TRADE DEFICIT DOMESTIC SAVINGS OF NET
FINANCIAL ASSETS IS DECREASING (NET DOMESTIC DEBT IS
INCREASING) 3% OF GDP PER YEAR.
According to the Federal Reserve's flow of funds data,
the 2004 additions to household financial assets were
a net $590 billion. This was 6.8% of personal
disposable income, providing a meaningful measure of
the cash flow going into new financial savings.
WONDER WHERE THAT NUMBER COMES FROM, DETAIL, ETC. AS
ANOTHER SECTOR HAD TO BE LOSING THAT AMOUNT AS
FINANCIAL ASSETS EX GOVT. NET TO 0 FOR THE VARIOUS
SECTORS.
This increased the household's financial net worth to
$26.1 trillion, way above any other country's savings
and plenty to fund profitable domestic investments.
BACKWARDS CAUSATION. INVESTMENT RESULTS IN/'CAUSES'
SAVINGS, NOT VICE VERSA.
If the 2004 appreciation in the value of homes and
equities were also counted, the 2004 saving rate was
46% of disposable income. Foreign savings invested in
the U.S., the counterpart of the widely criticized
current account deficit, is additive to our own large
store of savings.
AGAIN, FINANCIAL AND REAL ASSETS ARE BEING CONFUSED.
Rather than a "dependence" on foreign savings, the
U.S. is an effective user of it, profiting by growing
faster than the interest cost of foreign saving.
WRONG AGAIN. WE ARE SUPPLYING THE FOREIGN SAVINGS OF
$US VIA DOMESTIC CREDIT EXPANSION.
The combination of large domestic and foreign savings
allows heavy investment in the U.S. decade after
decade, part of the explanation for our fast growth
and the world's highest employment levels.
APART FROM THE CONFUSION OF WHAT CONSTITUTES DOMESTIC
SAVINGS OF FINANCIAL ASSETS, REAL INVESTMENT 'IS' REAL
SAVINGS, ETC. AS ABOVE.
Meanwhile, foreigners are actually losing ownership
share in the U.S. despite the $2.6 trillion net debtor
position, since U.S. assets are growing faster than
foreign savings in the U.S.
CAN'T FOLLOW THIS AT ALL. WHAT IS 'OWNERSHIP SHARE?'
How can the U.S. have so much aggregate savings when
the government's "personal savings rate" statistic is
low and has been falling? The personal savings rate
doesn't really measure saving in the real sense.
IT'S ONLY CLAIMED TO MEASURE FINANCIAL ASSETS.
It subtracts a broad measure of consumption, $8.5
trillion in 2004, from "disposable personal income," a
subset of household cash flow, and labels the
difference "personal savings." It was recorded at only
1.1% of disposable income in 2004, or $101 billion. It
would have been even worse if not for the $25 billion
Microsoft dividend in December, which counted as
income in 2004. Without it, the personal savings rate
would have been only 0.9%, nowhere near enough to
finance a fast-growing economy if it were a true
measure of saving.
IT IS A 'VALID' MEASURE FOR PURPOSES OF ECONOMIC
FORECASTING.
Fortunately, the personal savings rate doesn't have
much connection to the actual saving taking place in
the economy. Basically, the income side of the
equation is understated because it doesn't measure
gains or cash flows to the consumer,
IF THEY COME FROM OTHER CONSUMERS THE NET IS 0. IF
THE CASH FLOWS COME FROM BUSINESS THE BUSINESS SECTOR
LOSES FINANCIAL ASSETS AND THE HOUSEHOLD SECTOR GAINS
THEM.
and the consumption side is overstated because it
includes many long-lasting purchases, some of which
might better be considered investments.
TRUE, BUT AGAIN THOSE AREN'T FINANCIAL ASSETS. HE
KEEPS MIXING METAPHORS.
The Microsoft dividend illustrates one of several
divergences between the personal savings rate and
actual savings. Corporate profits are counted in
personal savings only if a dividend is paid, not by
owning an appreciating stock or selling it for a
capital gain.
CORRECT. SAME SOURCE OF CONFUSION.
In general, the reverse was happening in the 1980s
and '90s: Companies chose to provide shareholder value
through capital gains rather than dividends,
depressing the household savings rate even as actual
savings went up fast. Since capital gains and stock
buybacks are not included in personal income yet
provide cash for investment and consumption, the more
gains the economy was producing, the more depressed
the personal savings rate.
SOME TRUTH THERE. THERE ARE SHIFTS IN FINANCIAL
ASSETS FROM BUSINESS TO HOUSEHOLDS, BUT THE NET IS
STILL 0.
This applies not only to gains in direct holdings of
stocks but also to the inside buildup in pension funds
and 401(k) plans. While the original cash paid into
these plans is counted in income, the
later-and-often-much-bigger cash outflow from these
plans is not part of personal disposable income even
though it is available for consumption and investment.
ACTUAL PAYMENTS RECEIVED BY INDIVIDUALS AREN'T PART OF
PERSONAL INCOME? NEWS TO ME, BUT HE MAY HAVE A POINT
HERE IF THAT'S THE CASE.
Because pension funds had big compound gains in the
'80s and '90s, they caused an increase in consumption
without a corresponding increase in personal income.
This artificially depressed personal saving as
pensions were paid and spent.
OK. BUT OF COURSE THOSE FINANCIAL ASSETS DID COME
FROM OTHER AGENTS- THE ONES WHO BOT THE EQUITIES, FOR
EXAMPLE, GAVE UP THEIR BANK DEPOSITS (OR BORROWED-
SAME THING) AND THE ONES WHO SOLD THE EQUITIES GOT THE
BANK DEPOSITS.
A separate problem with the concept that America is
running on empty is the definition of consumption,
which understates investment and household savings by
making no distinction between purchases for immediate
consumption and purchases with lasting value.
TRUE, BUT AGAIN, THAT IS NOT ABOUT NET FINANCIAL
ASSETS.
For example, consumption includes education. Even as
it has become an increasingly valuable investment in
human capital, buying it has pushed the savings rate
lower and lower. The absurd result: Spending less on
education would raise the "personal savings rate" even
though it would reduce future U.S. growth.
IF THE FUNDS SPENT GO TO OTHER PEOPLE THE NET
FINANCIAL ASSETS OF THE HOUSEHOLD SECTOR IS THE SAME.
The broader national saving rate (household and
corporate saving less government consumption) suffers
from some of the same drawbacks as the 1.1% personal
savings rate.
NO, WORSE THAN THAT, IT SIMPLY RESTATES THE TRADE GAP.
IT'S A THROW BACK TO GOLD STANDARD/FIXED FX TO CALL
GOVT SPENDING A DROP IN GOVT SAVINGS.
Consumption is defined broadly, income narrowly. This
depresses the national saving rate even though the
U.S. ownership of assets net of debt is high and
growing at a fast rate. For example, consumption
includes personal education plus corporate and
government training and R&D expenses, all of which
facilitate innovation and future growth.
TRUE, BUT SAME MIXED METAPHOR
National income doesn't include capital gains, the
increasing value of U.S. real estate, or the (rather
large) excess of the appreciation of U.S. assets
abroad over foreign assets in the U.S. Recognizing
these adjustments, the 2004 national saving rate of
13.7% of GDP and investment of 19.7% would both be
even higher and the current-account deficit gap
narrower (by at least the mark-to-market adjustment to
the net international debtor position).
AS ABOVE.
Many economists and politicians have been holding
their breath for years waiting for U.S. consumption
and investment growth to expire, even though household
savings isn't low and is unlikely to limit the
expansion.
FINANCIAL BURDENS RATIO EX MICROSOFT DIVIDEND IS
CLIMBING BACK TOWARDS HISTORIC HIGHS.
They explain each quarter's fast growth as the last
gasp of a nation running on empty. Rather than
worrying so much and so publicly about a shortage of
savings
DEBT SERVICE RATIOS DO MATTER!
or foreign withdrawals,
THIS REDUCES DEMAND IF NOT 'COUNTERED' WITH INCREASED
DEFICIT SPENDING OF DOMESTIC OR GOVT SECTOR.
we should be working hard to encourage more
innovation and engineering, less regulatory, tax and
structural drag,
YES.
more savings for those who haven't been saving,
THAT REDUCES DEMAND.
and fewer tax distortions of market-based savings
behavior.
????
Mr. Malpass is chief economist at Bear, Stearns.
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