Going for crazy broke
Why aren’t Americans still saving?
James Saft is a Reuters columnist. The opinions expressed are his own.
A look at the fall in the U.S. savings rate raises one crucial question: are Americans crazy, or just broke?
The answer may hold the key for whether the country is headed for another recession or a policy-engineered recovery.
The personal savings rate fell in September to 3.6 percent, the lowest since December 2007. Given that household balance sheets are still under stress from tumbling housing prices — and tiny rates of savings for much of the last decade — this makes little sense as a strategy.
If anything, the past 20 years should have taught Americans that their expectations about how fast their assets can grow, and how likely they are to be dealt a financial blow like illness or unemployment, were too rosy. Conventional wisdom in the wake of the great financial crisis was that savings were headed higher and would stay high for a long time. Many people in the U.S. were working a financial high-wire act without a net and needed to reduce risk.
Things have not turned out that way. The savings rate did claw its way higher in 2008 and 2009, ranging mostly in the 5 to 5.5 percent range, but started to head south this summer and has now been falling for three straight months.
A turning away from savings makes a certain amount of sense. After all, almost all of the policies put into place since late 2007 have been designed to transfer money out of the pockets of savers to cushion borrowers. Real negative interest rates punish those who have saved, forcing them to either live with very low returns or take on commensurately higher risks.
At the same time policies intended to aid the housing market have managed to reduce outgoings for many borrowers without actually lifting prices, which would share the benefit between borrowers and those who own their homes outright. A new round of mortgage bond buying by the Federal Reserve, something that is in the offing, might only further reduce loan costs without lifting prices.
All of this makes a depressing backdrop for savers, and some may have decided that the rewards and risks of thrift don’t add up and can’t keep up with the pleasures of spending. In its own way, this would be a triumph of monetary policy, as the Federal Reserve will have coaxed people to do something that is arguably against their own best interest in service to the, perhaps, larger goal of cushioning the blow of deleveraging.
MAYBE THEY ARE JUST BROKE
So, if households are spending because they don’t see the point in saving, score one for the Fed. There may be a simpler explanation, and a look at last week’s surprisingly strong U.S. gross domestic product figures helps to explain.
While consumer spending helped to drive GDP to a 2.5 percent annual growth rate, the stuff people were spending money on was telling. Spending on health care and utilities was the main impetus behind the consumer contribution to growth, and after all those are things it is really hard to cut back upon. And this is happening within a context where there are increasing signs that Americans are putting off or forgoing medical care for economic reasons.
Really it seems that people were not saving because they simply did not have the money. That makes it much harder to look at recent data, some of which has been reassuring, and conclude that the risk of another recession is past.
“The hallmark of the Q3 GDP report is that a massive and unsustainable gap has opened up between incomes and spending,” Gluskin Sheff strategist David Rosenberg wrote in a note to clients.
“If we don’t soon start to see personal income growth revive, then consumer budgets are going to be staring a contraction in the face.”
If that contraction does begin to emerge, then the safe bet is that the Federal Reserve will dish up more of the same kind of policy in response. Already several Fed officials have raised the possibility of another round of mortgage bond buying. While it is hard to argue that the housing market is at the center of the economic malaise, cheap financing so far does not have a good track record.
One thing is clear, at some point the savings rate will have to rise. Putting that off for a time may help ease the pains of deleveraging, but only by extending them. That is a temporizing measure rather than a solution.
Asset markets aren’t priced for the rise in savings, but some day, when the policy drugs wear off, they will be.
(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)