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Posted by warren mosler (65.113.90.18) on 20:40:02 04/04/05
In Reply to: Re: Malpass' WSJ comments re personal savings posted by George R
: 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
OF THE DOMESTIC SECTOR
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.
YES.
:
: 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?
PRETTY MUCH. IT FACILITATES CREDIT BUT NOT DEBT SERVICE.
THINK OF THE SECTOR AS A WHOLE BECOMING MORE AND MORE INDEBTED TO GOVT, INCURRING HIGHER AND HIGHER NET CHARGES AND LOSS OF INCOME AS GOVT TAKES 3% OF INCOME/FINANCIAL ASSETS ANNUALLY.
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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