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Posted by George R (24.149.128.95) on 12:23:52 04/02/05
In Reply to: Re: Malpass' WSJ comments re personal savings posted by warren mosler
Warren you ve made clear that net financial assets of non-govt sector are govt securities outstanding, cash in circulation and reserves at the FED. Further that these net financial assets are decreasing currently at the rate of 3% of GDP per year. How long can this continue? .until credit expansion ends .. which is a function of the households ability to service debt it takes on.
Here s where I need some help. You also recognize other real assets including home equity and other net real assets at market prices exist. You suggest that these real assets don t play a role when one assesses households ability to service debt because, for example, when a house is sold its purchaser would be another household so there is no net financial asset created, just deposits traded? Is this correct? Thanks
: : 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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