Stockton, Cyprus, and the savings puzzle
By James Saft
(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.
TRIUMPH OF MONETARY POLICY?
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.
MISTRUST OF INSTITUTIONS?
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.
OKUN’S (FLEXIBLE) LAW
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, Reuters columnist 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. For previous columns by James Saft, click on)