James Altucher: “The Underlevered American Household”

Lets just look at what’s wrong with a few items in Jim Altucher’s column yesterday, “The Underlevered American Household.”

I may have to address the rest of the erroneous analysis in a full column — but for now, let’s stick with the first chart in the article. Jim believes the following chart is “mostly useless.”

click for larger graph

Source: BEA

We are consuming more than we are earning. I suspect the reason for this is the failure to adapt economically in the post crash environment. Despite Real Income being negative, as a nation, we have not adjusted our consumption habits. Cheap money ala Greenspan has allowed us to party like its 1999. Only its not — its a post crash world.

The Failure to recognize the significant shift in the wage environment is potentially worrisome, with consumer spending accounting for almost 70% of GDP.

Perhaps a little context might provide some utility. The United States, for the first time since the Great Depression, has a negative personal savings rate. Here’s what that looks like graphically:


77 year chart, Personal Savings Rate
click for larger graph

Sources: BEA, RR&A

The savings spike during WWII was aberrant — War Bonds, rationing, the lack of consumer goods (the industrial sector shifted to military production) explain why those five years were the all time savings highs.

And the rest of the time — why was savings rate so much higher throughout the rest of the century?

Jim dismisses it, claiming this “means that according to the way economists working for the government calculate income and expenditures, we are spending more than we make.”

That’s a snide dismissal of the data. This is not a seasonally adjusted, hedonically altered, absurdly core focused number. This is a simple series that measures savings, spending and income.

Jim also notes that “capital gains are not included in personal income.” But neither was it included during the prior three quarters of a century of data.  It is irrelevant to the question of “Are we spending more than we earn?”

I cannot so easily dismiss an data which represents an historical anomaly. Indeed, anytime something occurs in a long data series which has been a rarity historically, its worth sitting up and paying notice.


UPDATE: June 23, 2006 11:37am

Wow, this is a surprisingly popular post — both the WSJ and Dealbreaker picked it up:

WSJ Blog Roll — Morning Edition



The Underlevered American Household
James Altucher
RealMoney.com, 6/21/2006 2:30 PM

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  1. noname commented on Jun 23

    I’m mixed and willing to believe either conclusion. What’d be interesting is if there was data to capture what James thinks is missing from the ‘savings’ and add that back over time to see if there is a net decrease in that number. I’m tempted to believe that since we’re comparing apples to apples that the decrease is real. But certainly home and stock ownership are more prevalent now and there is some boost from capital gains. I just don’t know how much.

  2. john commented on Jun 23

    I’ve done some thinking about this and at first I thought it was a result of the fact that the rate of interest paid on savings is hardly worth the bother. Even with the fed raising rates banks have absolutely no incentive to pay more money to savers because they are making so much lending long on credit cards at 21% or better.

    But I think my father’s generation (people who actually participated in the festivities of the 30’s, early 40’s) became savers because they saw that as their only salvation. My generation (war babies) grew up with a hunger for everything and suddenly there was a lot of “everything.” Also a lot of easily available credit to buy “everything” with.

    Credit eventually takes its toll on everyone in that it makes everything more expensive than it should be. Consequently the “extra money” that our parents put to savings we have used to service debt. If you were to overlay a debt chart on the savings chart I think you will see clearly where the savings went.

    Is that a good thing or a bad thing? I don’t know. It is just a fact of life in an economy where nothing has any real value and the only thing that matters is interest rates.

  3. mike commented on Jun 23

    I have heard it said that the savings rate doesnt include 401k or IRA contributions. Does it include investment which is a form of savings? Is that true and would the numbers be different if it were true?

  4. Software Nerd commented on Jun 23

    I’d really love to see the historical trend, broken-down age-range.

    As the size of older age-groups grow relative to the overall population, one would expect a drop in the overall rate. So, a second level of detail — by age-range — would highlight the nature of the “problem”.

  5. 23 commented on Jun 23

    so if we are to believe investment income is subsidizing the consumer, does that imply that bear markets would contribute to an economic slowdown? IE, slow economy > markets down > consumers lose cap gains income subsidy > economy slows even more > etc > etc.

  6. david foster commented on Jun 23

    “capital gains are not included in personal income.” But neither was it included during the prior three quarters of a century of data”…however, lots of money that 30 years ago would have been in savings accounts (with the interest presumably included in personal income) is now in stocks, with most of the total return occurring in the form of capital gains.

    I don’t think this by any means explains the whole trend, but it might be part of it.

  7. Steve C commented on Jun 23

    Even though I would not conceive of doing it, a large number of Americans use their homes as ATMs. As the chart on this site showed on the 21st, the Mortgage Equity Extraction has been massive the last 5 yrs. – enough it seems to keep our economy out of recession. Some say Greenspan was wrong to lower rates as he did which supercharged home prices – but what choice did he have?

  8. jj commented on Jun 23

    consumption and debt have increased as the level of home equity has increased the last 10 years… it’s the exact reason that homeowners re-mortgage for MEW’s and use that for consumption….. as real estate values fall , I would imagine that consumption will fall and savings rate levels will rise some

  9. royce commented on Jun 23

    Not including 401Ks in the savings rate adds a wrinkle, but if you view the 401K as the replacement for the pension than many people used to have, the comparison of today’s rate with earlier periods may still be valid.

  10. B commented on Jun 23

    This is a hot debate. And, frankly, one that has supporters on each side. The statistics are inconclusive IMO. On the negative side, everyone believes Americans are endless spenders not capable of balancing their checkbook . On the positive side, people quote America’s wealth, which regardless of how you slice it, is massive.

    There are so many ways to manipulate this statistic. One is the fact that stocks and as I recall bonds are not included whether in a 401K or not. The other is there will be a time when America’s savings rate will likely turn negative and stay negative forever. The number of people over 65 since 1980 has exploded. I’m too lazy to look up the statistics but I’ve seen them before. So, if there are 4x the number of people over 65 today versus 25 years ago and, let’s say, 6x 40 years ago, those people are going to likely be on the “not saving” side of the equation the way this is calculated. But, who has all of the wealth? People who are over 55 and have worked a life time to create it.

    It’s worth noting but if anyone would actually bother to do some research and give us some real facts, it might be determined to be irrelevant.

  11. KL2005 commented on Jun 23

    In the 1930’s assets were plummeting. Today they are rising.

    The FED has successfully avoided a depression after the NASDAQ bubble unlike the 1930’s .

    While there will be problems (there are always problems) the future is good and comparisons to the great depression are unwarranted fear mongering.

  12. david foster commented on Jun 23

    The point about pensions is a critical one. If it’s true that defined-benefit pensions are not included in savings, and that stock/bond investments (whether in 401Ks or outside them) aren’t either, then:

    1)Two of the biggest repositories of true savings are missing from the data
    2)The trendline is probably worse than it looks, because traditional pensions probably represented a larger dollar amount than do their 401-K replacements.

  13. spencer commented on Jun 23

    401s are included in the data. the savings rate is the difference between total income and total personal consumption. so if you put part of your income into a 401 rather then buying a new car or something it is

    the meme that 401s are excluded is completely false.

    The point that capital gains are not included does distort the data, but it is minor. When
    people realize some of their capital gains by selling the assets it becomes income that can be spent. so the spending is counted, but the income is not.

    This is becomming an issue because we are now starting to see a significant number of retirees using their past capital gains to finance consumption. But as far as I can tell adjusting for this might make the savings rate plus one percent rather then minus one percent.

    It would not change the long term trend in the chart.

  14. S commented on Jun 23

    I caught a very interesting interview with Dan Morehead of Pantera (I believe he’s one of Julian Robertson’s tiger cubs) on Bloomberg TV a few weeks ago in which the negative savings rate was discussed. One thing he mentioned that I had never heard cited before is that the spending habits of the uber-wealthy skew the statistic. As an example, he pointed to Larry Ellison, who for years has spent many multiples of what he has earned in “compensation”.

    Examples I can think of are Richard Kinder of Kinder Morgan, who pays himself a salary of $0 per year. And Warren Buffett earns $100,000 (but my impression is he is a very frugal man so he may not spend much more than that!!)

  15. Alex Khenkin commented on Jun 23

    “The point that capital gains are not included does distort the data, but it is minor. When people realize some of their capital gains by selling the assets it becomes income that can be spent. so the spending is counted, but the income is not.”
    The confusion between savings and capital gains is stunning it its persistence. Capital gains ARE NOT savings. In order for John to realize his capital gains he has to sell the assets to Sam. Sam buys John’s assets with his (Sam’s) savings. Aggregate change in “savings”: 0. Zero. Nil. One man’s gain is the other’s loss. It’s called “equilibrium”: for every seller there’s a buyer.
    Small Investor Chronicles

  16. jm commented on Jun 23

    Capital gains in the stock market?? Huh????

    There’ve been no net capital gains in the stock market since about 1998. Any gains on amounts invested in the valley of mid-’02 thru mid-’03 are more than offset by the losses on the inflows of the peak bubble years.

    Barry made one of the essential points about capital gains — that they’ve always been there — and spencer just above makes another.

    It is deeply disturbing that people who can’t (or won’t) understand these basic realities are able to pose as authorities on finance.

  17. M.Z. Forrest commented on Jun 23

    Stock and bond ownership including 401(k) investment isn’t taken into consideration, because they are not savings. The savings rate is a current measure of a household’s ability to pay current expenses. Whether it is borrowing against the home, the 401(k), or realizing capital gains, the person still has more current expenses than current income. A rational person will not continue converting assets into money, either through sale or debt, to subsidize a current income deficit. Eventually, they will reduce consumption.

  18. D. commented on Jun 23

    I am amazed by how skeptical people are about this terrible savings rate!!! Don’t you see the spending frenzy going on around you?

    1. Defined benefit plans are not what they used to be. Many are unfunded and the best thing that could happen to keep corporate America’s pensions off the government’s back is for rates to head higher in order to shrink liabilities.

    2. More than 50% of America’s boomers have less than 50K saved up for retirement. I can bet my bottom dollar that more than a couple of cash strapped boomers will be selling their homes at the same time to get some equity. Who’s going to be buying their houses? Gen-X? We’re much less than them and many without a penny! Go look at the US population pyramid, it’s the first time since the 30s that the group filling the shoes is smaller than that of the leading group!

    If this chart can’t convince you, I don’t know what will!

  19. ffm commented on Jun 23

    this chart is similar to the debate about how you value a company …. on Assets or Income …. that’s why there are income statements and balance sheets ……Buffett looks at Balance Sheets , he couldn’t care less on Income…….would someone tell us what the average Balance sheets is in the US / individual … I think that would be very constructive to this debate

  20. B commented on Jun 23

    I don’t see a spending frenzy around me. That is, other than those who have no meaning in their life and, thus, become compulsive spenders to feed their the pit of emptiness. Who do you hang around with?

    Could the POSSIBLE fact that 50% of some segment of the population having less than $50,000 be based only on the conclusion they are spend crazy? Or could it be that income and wealth disparity are greater than any time in modern history thus making it nearly impossible for many to save? You ever work at Wal-mart? Care to tell me how to save making $8 an hour? But, we are told those working in retail in that wage segment are teenagers. Ever see a teenager working at Wal-mart? No. I see the wage group you say only have $50,000 saved.

    If savings rates are that low for a large percentage of the populaton, I’d be more inclined to believe it is because after health care, school, food, rent, insurance, taxes, staples, autos, gasoline, etc, etc, etc, they don’t have alot left in their pocket. So, are Americans totally careless as you’d have us believe? If so, that statistically means you are indicting your family, friends, associates, etc for all being stupid. I know very few people like that. JMHO.

  21. Sestina commented on Jun 23

    Since compensation is skewed so much to the high end, it would be interesting to see what the savings rate is for, say, a 90% or 95% trimmed distribution. My guess is that the savings rate at the high end is higher, not lower, than it is in the middle. Warren Buffet is an anomaly.

  22. Andy commented on Jun 23

    “Defined benefit plans are not what they used to be. Many are unfunded and the best thing that could happen to keep corporate America’s pensions off the government’s back is for rates to head higher in order to shrink liabilities.”

    Seems rather odd. So, do you know how the government debt is financed? Since the late 90s, short term. On average, federal debt has a maturity of five years or less. By keeping its debt short-term, the government has been able to realize a decline net interest payments. This will lead to even higher deficits as rising rates slow down the economy, shrink government tax revenues, and increase its expenses. The U.S. government has a short term ARM just like the consumer.

    So, in addition to all of the other reasons why higher rates would kill the consumer, housing, etc we’d want to raise rates to help pensions?

  23. alan commented on Jun 23

    Alex Khenkin nailed it. Capital gains are NOT, I repeat NOT savings because it requires someone else to take his savings out of the bank or for money to be created out of thin air to pay for this cashing in of capital gains. This concept also includes houses which are an asset and NOT savings.

  24. RB commented on Jun 23

    According to the Fed, 65% of the savings is contributed by the top quintile. And despite that, if we have negative savings, it seems to imply poor savings indeed and not just an income disparity.

  25. Kris Tuttle commented on Jun 23

    I’d like to believe that economists and strategists have looked at these numbers in depth and know they are accurate but for such an important question I’m surprised that we don’t have tons of data to look at in order to resolve to an true consensus.

  26. Zapper commented on Jun 23

    Fiat currency post 1970s Barry. As an extreme example a hyperinflative economy tends to create a panic in the citizen where they have to quickly throw their money into some kind of asset before it gets depreciated away. As the Fed has tried to maintain a 3-5% growth in money supply over the last 30-40 years currency has depreciated by the same amount. Rather than having a panic you have a slow steady trend to full deployment of peoples wages. They tie it to their homes, stocks, bonds, consumer goods. Anything but putting in a piggy bank or under a mattress.

    Over time the only people left that are saving are the old timers that lived through the depression. They eventually die off and what ever is left is inherited by the new generation and redeployed.

  27. Barry Ritholtz commented on Jun 23

    The reason you have to think about investment differently than savings is risk.

    Imagine if it did count: If you had a tech heavy portfolio in 2000, you lost 80% of your “Savings” by October 2002.

    Thats why savings and investment have to be thought about differently

  28. B commented on Jun 23

    Risk indeed. Imagine that. So, if George Bush would read your blog, he’d know why the average joe doesn’t want to piss his Social Security away in some type of equity investment plan. In a world of great uncertainty about their future, their pensions, their jobs and their way of life, most average people want something that they can count on. A guaranteed Social Security check so if all else goes to hell in a hand basket they have one thing in this world they can count on.

    Now, fat cats and those who have great jobs want to manage their Social Security. And, what class to politicians and lobbyists fall into? And, why is sentiment of Congress and the President so low?

  29. royce commented on Jun 23

    True, but all savings- every dollar that is not spent- is subject to the risk of loss. You can put it in the bank, in gold, and there’s no guarantee that in a year or two it’s not worth less than it’s worth now.

  30. Lem commented on Jun 23

    Why do you and others not attribute some of the negtative savings rate to a “rational response” to recent and predicted economic conditions? For (poor but solvent) folks like me who have saved all their lives, a recent negative savings rate has been a rational response to one factor that has prevailed (extremly low savings/loan rates) and two that threaten future buying power (inflation and dollar devaluation). Therefore, I choose “now” to buy my new vehicle and other durable goods. I would otherwise spread out these purchases over the next 5-10 Years.

  31. JoshK commented on Jun 23

    This makes a lot of sense for a few reasons.

    1. Investments are not counted. If you buy a share of MO and collect a 4.5% div, that’s not counted. But, if you have a bank account that pays you 2% and gives you no inflation protection, that is counted as savings. That’s just silly.

    2. For most of history, people saved to be able to take care of themselves when old, and they used the safest vehicle, banks, for a large chunk of that. In this chart we are seeing the generation turnover to all the people who expect SS to cover them (at least to a degree).

  32. M.Z. Forrest commented on Jun 23


    Dividends are counted as income. The 2% on your passbook is counted as income, but the amount in there to get the 2% is not. Savings rate is the difference between income and expenditures. The best use of the measure is to determine the short term solvency of the consumer.

    To put in corporate terms, a negative savings rate is like investing in a company whose liabilities due within one year exceed their income and current assets. It may be a great company, but at some point it is going to have sell some longterm assets to remain solvent. Think of it as cash flow analysis for the consumer.

  33. 2L commented on Jun 23

    Hey Barry, have you read “running money” by Kessler?

    Are we borrowing to fill our insatiable desire for cheap imported goods? … or… Are foreign countries making cheap exported goods to fill their insatiable desire for american dollars?

    I suppose it’s simply a matter of personal belief or viewpoint or both.

  34. JoshK commented on Jun 23

    M.Z. Forrest,

    Above is actually the first time that I’ve heard anyone say that the savings rate may include investments. I’d love if anyone has a link to the real definition of this.

    But, as far as #1, while the dividends are income, the investment to get there is not, so you make $100 and spend $95, borrow $5 and invest $10. Let’s say your $10 earns 7%. This would show up as a negative rate of savings, even though the $10 got you a .70 cent return.

  35. M.Z. Forrest commented on Jun 23

    In economics, personal saving has been defined as personal disposable income minus personal consumption expenditure. In other words, income that is not consumed by immediately buying goods and services is saved. Via Wikipeida.

    Your example is correct JoshK. At an individual level that situation would not persist long. You may do it one month, but you most likely wouldn’t do it for 10 months. At an aggregate level, the same is true. The biggest problem with declining savings rates, let alone negative ones, is the ability of a person or an economy to react to an adverse outcome decreases. For example, the person in your example has a heart attack causing them to have to sell assets immediately.

  36. Barry Ritholtz commented on Jun 23

    My apologies to Jim,

    I was hoping to get a full column up on RM today, in response to hsi column. The discussion here was a chart plus a few paragraphs — but not a full column, and not in the same forum.

    Unfortunately, a personal matter came up that I had no choice but dealing with immediately, and the column was put on hold. (If this could have been avoided, believe me, I would have preferred it).

    Thats how I write most columns — its start out as a germ of an idea, I then add a chart, then it evolves into a full blown thing.

    My apologies to Jim for not disucssing this in more details in the original forum (it could not be avoided)

  37. JoshK commented on Jun 23


    By definition I mean what #’s does the survey include.

    “The biggest problem with declining savings rates, let alone negative ones, is the ability of a person or an economy to react to an adverse outcome”

    Every situation is different, and that makes it hard to properly evaluate these numbers. A few situations:

    1. Everyone piles into real estate “investments”, and then as the housing market cools off, people sell and find their assets worth 1/2. They now have all of the leverage, none of the gains, and people are selling their kids in the street.

    2. Everyone saves 10% a year in bank accounts and then inflation spinds out of control. The market minimum wage is $1,000/hr and you need a wheelbarrel of money to buy a loaf of bread.

    3. People borrow and spend for educations in hard technical subjects and soon have tremendous earnings power. They also invest in R&D and create great new products.

    4. People borrow and spend for educations in topics like “political science” and sociology and then companies invest in R&D which produces nothing.

    Inother words, investing can be a lot better or a lot worse than sticking the money in the back. It is the lack of a qualitative sense of what constitutes this spending that makes these numbers hard to use.

  38. RB commented on Jun 23

    So, how do you all interpret the negative savings? One scenario is that there is a reversion to the mean in terms of savings due in part to stagnant 401-K worth and falling house prices, in which case, despite the Fed’s best efforts to revive a failing economy, there aren’t enough people willing to take on debts nor are there enough creditors willing to offer credit. Sort of like in those history books..

  39. Estragon commented on Jun 23

    It’s worth noting that the recent decline in the savings rate is concentrated mainly in the top quintile of net worth. The bottom net worth quintiles actually increased savings. This supports the notion that gains in real estate and financial assets drove the consumption, and IMHO is critical to developing any sort of understanding of what effects may arise in the future as a consequence. This is apparently NOT joe six-pack running up his credit cards.

  40. szara commented on Jun 23

    I’m amazed at how few people understand the savings rate metric. It’s the residual of income – expenditures. It’s not a measure of what’s in your piggy bank. Good work by Spencer and MZ Forrest for explaining this point. I don’t see how to argue around Barry’s point that we are in a massive historical anomaly.

    If you are interested in a slightly different angle, the BEA has been working with the Federal Reserve to integrate the Fed’s Flow of Funds (FFA) savings measures, which basically tell the same story. See this explanation at http://www.bea.gov/bea/DYK/comparisonps.htm .
    Simplest interpretation of FFA trends is that real earnings stalled out post 2001 and consumers compensated by liquidating financial assets and leveraging up real estate. With house prices down and interest rates up, we no longer have that option. I’d love for there to be an upside for ongoing consumer expenditures here, but I just don’t see it.

  41. miami commented on Jun 23

    Honest question – do you think the fact that the gov’t changed the way they measure the savings data a few years ago [or more- it could have been in the 1990s] could be responsible for the change? I.e. it’s calculated differently?

    I don’t know either, I didn’t see anyone mention that fact yet, however. Certainly relevant even if it only slows the rate of decline.

  42. miami commented on Jun 23

    The gov’t keeps changed the accounting for the NIPA numbers. Net Personal Transfer Payments abroad are subtracted from savings – this is silly. Donations are counted as ‘spending.’ As more legal immigrants send money back home, this will get larger and larger: it’s gone from $14bn in 1993Q1 to $46bn in 2005Q1. perhaps that should be added back?

    Here are some of the changes in NIPA calculations in recent years that affected the savings rate –
    ‘changes in the measurement of wage and salary income of employees covered by unemployment insurance (see U.S. Department of Commerce 2001, p. 24). ‘
    Also –
    ‘Another example is the 1998 revision in the NIPA’s treatment of distributions from mutual funds, …. While this had no effect on national income, it lowered personal income, with the average saving rate for 1995-1997 falling from 4.3% to 2.8%.’

    ‘Savings’ is the gov’t broad measure of DPI. DPI does not include capital gains, IRA gains, pension plans or gains, or any other asset gains, et al.

    I think household NW [hnw] should be used. Total US hnw is $50 trillion, but includes RE. If, if, there is a housing bubble, we should EXCLUDE that, so financial NW, ex-RE, in the US is $26 trillion.

    That’s *after* deducting mortgages and cc debt. Our GDP is $12.5 tn, so just over 2.08x GDP has been saved by US citizens.

    Now look at high-saving Japan:
    They have $10tn in FNW. Their GDP is just over $5tn. They have saved 2x their GDP. We save more than Japan.

    If one quits their job to start a McDonalds, you will be deemed as not saving any money, probably dis-saving for years, even if your McD is worth $1mm in 5 years. That makes no sense, does it??

    Perhaps the rise of an ‘entrepreneurial class’ the past 10 years or so is also leading to this dis-savings rate. That, combined with the NIPA changes mentioned above, would certainly distort any data, the gov’t has removed the opportunity to make an apples-to-apples comparison, so those charts you included are not useful unless one goes back and makes all the data inputs the same.

  43. JoshK commented on Jun 23


    Again, the question is to what extent are investments considered expenditures? Buying a new factory is different than buying ice-cream.

  44. B commented on Jun 23

    So, my mom just joined the millions and millions of baby boomers heading into retirement. If there are 20 million people in retirement today and let’s say there are 60 million in ten years. She’s not working. And, she is drawing down her assets in retirement. As more of the economy moves into retirement and these are the peoplel who have all of the assets, can someone tell me how the savings rate the way it is currently defined will ever turn positive?

  45. szara commented on Jun 23

    Very interesting discussion. This topic really touches a nerve, doesn’t it? Kudos to Barry for bringing it up.

    If you buy ice cream, that’s a “personal consumption expenditure”
    If you buy an ice cream factory, that’s “private fixed investment” in NIPAspeak. I think that the BEA tries pretty hard to make that distinction. The BEA website has loads of information on the National Income and Product accounts at http://www.bea.gov/bea/dn1.htm and it’s easy to download their data tables.

    For those who dislike the NIPA savings rate metric, I suggest looking at the Federal Reserve FFA (Flow of Funds Accounts). Very different approach, but similar conclusions.

    Yes, the oldest baby boomers are retiring now, but the largest cohorts of boomers were born around 1960. If you look at Census data, the largest age groups are people in their 40s and 50s. These are people that one would expect to be at the peak of earning power, and very focused on accumulating savings. So I don’t see the age structure of the population as driving dis-saving. Twenty years from now is a different story.

  46. M.Z. Forrest commented on Jun 23

    Another analogy:

    The savings rate is similar to EBITDA. Total Asset Value is similar to book value. Those that want to ignore the savings rate are like fundamental investors who want to ignore EBITDA. The first foundational block of value is EBITDA. The price of an asset is primarily determined by its ability to produce income plus a risk premium. The second foundational block is the cost of the capital to produce a product.

    Buying a plant is considered consumption. The purchase should bring an incremental increase in income. This in not measured by what you can sell it for, but what you directly earn from the production of that plant. If that plant doesn’t produce net income, you experience a decrease in income. In the aggregate you end up with a negative savings rate when the consumption exceeds the income.

    I don’t think the boomers’ contribution to assets is all that significant. In the aggregate, income will still have to exceed consumption otherwise asset values go down. My biggest concern is if foreigners start selling their U.S. assets. If you are correct however, we will have the mother of all asset corrections. A boomer’s second home in Arizona is still only worth whatever the rental income he can extract. If due to oversupply he can’t get a pittance in rent, his asset will be worthless.

  47. muckdog commented on Jun 23

    “Barry Ritholz suggests the US issue War Bonds.”


    First, there has definitely been a mind-shift on how folks view credit. What used to be the unthinkable (especially for depression-era folks) is now exactly opposite. Something is wrong with you if you’re not leveraged to the hilt!

    But the savings rate does exclude capital gains, I do believe. So maybe folks are saving less because they feel they have more assets. Indeed, the average net worth is at record highs. And maybe as the population is aging, folks who have amassed wealth are saving less because they don’t need to save.

    Can’t take it with you. At some point, savers have to spend it. Maybe that’s starting now.

    (Just thinking out loud.)

  48. Zach commented on Jun 23

    I have read James for years and he is a really smart guy. However, I hope that he does not believe what he wrote and that he is just postulating. Hearing how ridiculous his argument sounds, with charts that disprove his point, I am more sure that the US consumer is headed for a hard landing!

  49. Si commented on Jun 23

    Steve C:-
    Some say Greenspan was wrong to lower rates as he did which supercharged home prices – but what choice did he have?

    I would say his choice was recession. I guess this is another part of the no sh*t society that we live in these days. Sometimes you just have to be cruel to be kind to some extent.
    This is also part of the reason there is a low savings rate at the moment. Older people did not live in the cosy kind world we have these days. Savings were away of affording yourself some level of security.
    As I have sid before we live in a sh*t doesnt happen world which has reduced (some) peoples responsibilities to themselves and their impression of what society owes them. The keeping up with the Jones’ attitude for instance, I believe is much more prevalent these days than in the early or even mid years shown on the grahics. If we are not taking cash out of our houses to pay for ‘stuff’ that basically looks good as well as the things we actually need, we are complaining because the raising of interest rates is hampering our ability to do this.
    Surely we live in a spending culture these days. I was born in the seventies and I never saw anyone walking to work everyday..(read..sitting in an SUV) with a Jumbo latte’
    Its all about image and it has to be paid for. People of different generations were I suspect more bothered about surviving.

  50. D. commented on Jun 24


    When I go to the States, I’m always amazed by the size of the houses & cars as well as the number of cars American households owns… especially when I find out how much their earn.

    You Americans are in denial. You don’t see it!

    As for here, I notice a lot of couples who don’t have two nickels to rub together buying Sub Zero appliances and Peg Perego strollers when you can get a 12$ umbrella one that works just fine.

    30% of kids in Quebec go to private school. More than a third of these come from housholds earning less than 60K. The irony is that our public system is still fine and, if more people stayed in it, it would be even better! So these families would be better off saving their money for University or retirement.

    Many people don’t realize they are killing themselves trying to get ahead!

  51. trader75 commented on Jun 24

    Man oh man oh man, there is so much thin-air conjecture and muddled-thinking slop in that Altucher piece you’d need an industrial size mop and bucket to clean it up. It’s hard to even know where to begin–better to back away slowly. Like the ID / string theory critics say, “Not even wrong!”

  52. bt commented on Jun 24

    B, Somewhere up there you expressed skepticism about the notion that US consumers are spending more than ever. Why do you have a hard time believing that? The consumer now accounts for nearly 73% of the GDP (remember that GDP has grown quite a bit cumulatively in the last 15 years). Just look around and notice what is happening in the real estate market. The average home is larger is size; more US households own homes (about 70%, which went up from about 64% a few years ago; that is a huge change at the margin for something like homeownership). What this means is that US consumers have increased their maintenance burden (it takes cash to maintain a home – heating it, cooling it, decorating it, cleaning it etc), have borrowed like crazy to build that residential overcapacity (akin to companies building overcapacity in the bubble of the 90s). The % of disposable income spent on servicing debt is at new highs (over 14%). The last time it hit these highs was in the 80s when interest rates were at their HIGHs for the cycle. This time, the % of disposable income spent to service debt is at all time highs even as interest rates are at their LOWEST. Which means, in the 80s the direction of rates (went lower from highs) helped the US consumer handle the debt service load but now, with interest rates heading higher from historical lows, the debt load can only get worse. As mentioned earlier, more residential capacity means more maintenance, which will draw cash (bet real estate agents don’t ever mention maintenance costs as often as they mention the tax benefit of mortgage interest payments).

    In summary the US household, in aggregate, acquired residential overcapacity and will be paying for that in debt servicing as well as in underappreciated and invisible maintenance costs. The main driver behind this trend to building overcapacity is wider acceptance of the view that homes are investments over the view that homes are a place to live.

  53. Estragon commented on Jun 24

    bt – “with interest rates heading higher from historical lows, the debt load can only get worse”; not necessarily. As noted in an earlier post, the decline in savings is coming from the upper net worth quintile. A cursory look at the long range chart of savings rates shows fairly steady decline since the early 80’s. A similar look at a chart of bond rates shows a similar steady decline covering the same period. As discount rates declined, prices on financial assets rose. The simple conclusion is that the high net worth quintile, faced with declining cash yields (but increasing asset prices and resulting cap gains), have been increasingly using capital (dis-saving) to support consumption. If/when interest rates move back up, it follows that this cohort will go back to living off the cash returns.

    There may well be some stress for lower net worth homeowners if/when rates rise, but the savings rate data don’t appear to indicate there will necessarily be a sudden near term crisis. I suspect the severity of the stress in these cohorts will be related mainly to real employment income growth rates.

  54. Subramanian Rajagopal’s Weblog commented on Jun 25

    The final straw on the economic camels back

    Via The Big Picture:

    For the first time since the Great Depresssion, savings rate is now negative. See below the 77 year chart for Personal Savings Rate.
    Consumer spending accounts for 70% GDP. Now go figure how long the party will last. Get ready fo…

  55. D. commented on Jun 25


    The lower quintiles already have an average of 10K on their credit cards. Even if they haven’t increased their debt load, higher rates will surely impact them.

    And I’m sure that, even if they didn’t increase their debt load, they took the opportunity to switch from fixed to ARM!

  56. jab commented on Jun 25

    This interest rates “are historically low so even though they are going up it does not hurt” is such BS. The people that got a 4% variable interest rate and are now getting reset at 6% are going to see about a 50% increase in their mortgage payment!! They will get crushed!

  57. miami commented on Jun 26

    Lower quintiles most certainly do not have an average of 10k balance on their credit cards.

    The average balance for a card holder who does not pay in full is under $5k.

    Secondly, and more importantly, as revolving debt has risen, non-revolving debt has fallen as a % of income by 7% over the years.

  58. D. commented on Jun 27

    Well according to my research, the average american in 2001 owed close to 10K on his/her cards.

    Considering everyone and his uncle except the lower quintiles can get a HELOC, it is safe to say that the ones with a heloc would not keep a balance on their cards. So I assune that this 10K is held by the lower quintiles. On the other hand, if the number has decreased since 2001, it’s because many have transfered their balance into the heloc.

    In the last few years, credit spreads have been incredibly low, everything could easily be securitized as ABSs. This permitted credit card cos. to offer teaser rates.

    No matter how you look at it, rates are going up. And when credit spreads increase, it will get worse.

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