Stockton, Cyprus, and the savings puzzle: James Saft

April 3, 2013

April 3 (Reuters) – Whether out of necessity, mistrust or
simply the feel-good factor of soaring asset markets, Americans
appear to be cutting back once again on saving.

The personal savings rate stood at just 2.6 percent in
February, down nearly one percentage point from the year before,
according to the most recent data. Taken with January’s 2.2
percent rate, this makes the first time since 2007 we’ve had two
months in a row below the 3 percent mark.

If low savings are driven by confidence, either in the
bounty of the stock market or the opportunities in the job
market, then the savings rate may stay low but interest rates
may soon need to rise. If, on the other hand, low savings are
being driven by a lack of faith in markets or institutions or
even by a simple lack of capacity, then we may well be looking
at an extended period of low rates and lousy growth.

There is also a third possibility: a winners and losers job
market in which the highly skilled are confident enough not to
save and the rest are simply unable.


The first, and perhaps most likely, possibility is that
savings are falling because the Federal Reserve desperately
wants them to, and has engineered conditions in which more money
is flowing to riskier assets such as stocks and real estate.

The two best pieces of evidence to support this: the S&P 500
stock index is near an all-time nominal high; and house
prices are up 10.2 percent from a year ago, according to
CoreLogic data, the biggest rise since the bubble year of 2006.

The Fed hopes that some of the money created by rising asset
prices will be spent, and perhaps a corollary to that is that
less will be saved. If that works well, employment and
investment will follow in a virtuous cycle from consumption of
asset price gains. If it works badly, we have another market
crash and are left with balance sheets even more impaired than
last time round.


Another argument is that households are not saving because
they have grown cynical about the likelihood of them getting a
fair shake from banks, fund managers and pensions.

While no insured depositor has ever lost a single thin dime
in an FDIC-insured account, there are those who argue that the
clipping of large depositors’ accounts in Cyprus is liable to
convince some that saving is a losing game.

That seems an unlikely argument in the U.S., but events in
California, where the City of Stockton is arguing the terms of
its planned bankruptcy, may well reflect on a trend which will
undermine faith in the treatment of savings. Stockton is
interesting not so much because we can expect many more
municipal bankruptcies, but because its ability to honor its
promises to its pensioners is under debate. While the issue has
yet to be decided, its bond insurers are arguing in court that
they shouldn’t have to pay up on its bond defaults because the
city, by giving a sort of super-senior status to pension
payments, didn’t negotiate the bankruptcy in good faith.

That is an issue we are going to hear more and more about,
and it will not always end terribly well for pensioners. You
could argue that the new awareness of risk should drive savings
up, but it is also possible that people who feel they have no
control over their financial fate may choose consumption today
over possibly ephemeral income in the future.


There is another possibility which fits in quite well with
the data; namely that the labor force is divided between those
doing well enough not to feel the need to save and those who
simply can’t afford to.

The Fed, and most economists, have traditionally held to
Okun’s Law, a rule of thumb that observes that for every 1
percentage point rise in unemployment, GDP growth will be an
additional 2 percentage points below its long-term sustainable
rate of growth. That relationship now appears to be breaking
down, as labor costs have risen and productivity dropped,
indicating less slack in the economy than a look at the
unemployment rate would make you expect.

If that is because there is strong demand for some skilled
labor in parts of the economy (think natural gas workers in the
Dakotas) but low demand and little wage growth elsewhere, we
might actually be looking at a plausible explanation.

If you are one of the lucky ones with skills in demand and
whose house and stocks are going up in price, then why save? If,
on the other hand, you are an older person with fewer
high-demand skills and a busted retirement plan, or a
low-skilled younger person, you may simply find that saving is a
luxury you always end up putting off until tomorrow.

If true, expect pressure on the Fed over both its mandates:
inflation and employment.
(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. You can email him
at and find more columns at

(Editing by James Dalgleish)

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