James Grant observes:
“Mr. And Mrs. America, we predict, will shortly disappoint their hundreds of millions of fans and economic dependents. They will spend less, borrow less and save more. There would be nothing so strange about that—certainly, nothing to shock—except for the track record. On form, the American consumer is no more prone to save than the American Marine is to retreat.
However, with joblessness rising, house prices falling, gasoline prices orbiting and credit contracting, even America’s iron wallets must adapt. Hovering near the zero-percent marker, the savings rate has little farther to fall. It takes no great predictive courage to suggest that it may begin to rise, which we hereby do. If the savings rate returned to just half its level in 1992, it would reach 3.9% of disposable income, up from 0.6% at present. Disposable personal income is jogging along at the rate of $10.5 trillion a year. An increase in savings of 3.3 percentage points would amount to $346.5 billion of deferred spending. For perspective, in the 12 months through April 30, Wal-Mart Stores rang up sales of $383 billion.”
James Grant
Grant’s Interest Rate Observer
June 27, 2008
www.grantspub.com
via Welling@Weedon
Regarding gasoline prices:
http://badgerthelion.blogspot.com/2008/08/oil-when-charts-speak-louder-than-words.html
Grants is excellent.
My only concern is the day they announce the mandatory Use Your Savings To Bail Out Fannie Mae program.
While James Grant is engaging, analytical, thoughtful and entertaining American consumers will spend as much as the credit purveyors purvey to them ad infinitum.
Jim Grant, ever the incorrigible optimist, is a bit early with his predicted conversion of Americans from spenders to savers. Before the savings rate is forced to increase, it will have to go negative long enough to deplete what miniscule savings remain.
Hopefully, Grant is right on raising savings and shrinking credit.
This country has 2 deadly addictions: oil and credit. Sky-high prices are taking care of the first one slowly (and painfully) but surely. If the financial collapse takes care of the second, woohoo! That recession is shaping up to be the best thing to happen to us in a long time.
completely agree. credit and oil are like crack to the US. I dont know whether to laugh or cry when I see people rolling around in leased bently’s living in 6,000 houses with no equity. there a lot more people out there living like this than most people think. its going to be the upper incomes that are going to be hit the most. In two years from now I expect a large portion of thecountry to realize that there wealth is an illusion.
We are headed in to the depression/bk abyss…
I think that the U.S. in particular and to a lesser degree the G-7 nations have confused prosperity with material goods and consumption. On our most fundamental level, we are animals and we must consume to survive. The reality becomes what we consume going forward. I hope that our definition of prosperity changes a bit in the years to come. My parents were children in the depression. Prosperity for them was meal every night. Our prosperity going forward may be a McCoffee at $1.00 a cup and NOT $5.00 Grande Latte loaded. BTW – My dad at 85 years old kick my ass if I took him to Starbucks for coffee.
Wonderful prose and persuasive logic. Spending will presumably depend on inflation/commodities prices. In real terms, Americans may already be spending less, but more of the dollars are going to buy (less of) the same things. There is also the tendency to spend that comes with inflation that will counteract saving.
If oil prices come down, then perhaps Americans will be saving more. It depends on whether one believes in American exceptionalism (Americans are more prone to spend and borrow), or whether one believes in an individual-level business cycle (American consumers have been in an expansion mode, but now are in a recession). I favor the latter. There is too much faith in the “this time (or we Americans) its different”.
Wonderful prose and persuasive logic. Spending will presumably depend on inflation/commodities prices. In real terms, Americans may already be spending less, but more of the dollars are going to buy (less of) the same things. There is also the tendency to spend that comes with inflation that will counteract saving.
If oil prices come down, then perhaps Americans will be saving more. It depends on whether one believes in American exceptionalism (Americans are more prone to spend and borrow), or whether one believes in an individual-level business cycle (American consumers have been in an expansion mode, but now are in a recession). I favor the latter. There is too much faith in the “this time (or we Americans) its different”.
Since the basics are getting evermore expensive how is the average American supposed to save? Wages are not going up and the dollar won’t for long either.
Habits don’t change.
What changes is credit availability.
You cannot have a habit, if it’s not available.
“Since the basics are getting evermore expensive how is the average American supposed to save?”
Pray that they don’t extinguish the penny.
Since the basics are getting evermore expensive how is the average American supposed to save? Wages are not going up and the dollar won’t for long either.
I think the key to this is what constitutes “basics?” People, when forced to live with less, will discover that they can live with lot less than a typical American family uses in daily life. I know, growing up in a “third world” country, we lived with lot less and still got a great education and lived happy lives. It is hard for one of us to define what is “basic” and “a luxury” for others; each has to figure that out for themselves. So long as the credit system was stretched to provide easy credit, most folks didn’t have to think about defining what their basics were. With liquidity crisis (in personal balance sheets) knocking at the door, each will discover what their basics are.
IMHO, Americans have been building huge overcapacity in their personal lives. For example, buying larger homes than a generation ago, having more cars per person than a generation ago, etc. There is a lot of room for downsizing.
rational expectations wrote:
In real terms, Americans may already be spending less, but more of the dollars are going to buy (less of) the same things.
I contend that Americans were spending a lot more the last few years and getting less. The biggest expenditure/possession of an average American is their home and the inflation in home prices meant that folks were paying a lot more in the last few years to get equal or lesser quality home than a decade or two ago. Our economic growth essentially consisted of selling each other inflated goods. The higher prices and the higher rate of transactions showed up as “higher economic activity” and masked the deterioration in buying power.
Hmmm, so does that mean banks will see their deposits grow by over $300 billion per year (assuming the unsophisticated saver simply stashes their cash in a bank savings or checking account)?