Today’s New York Times (http://www.nytimes.com/2008/02/05/business/05spend.html?_r=1&ref=todayspaper&oref=slogin) carried an article calling attention to Americans’ diminished infatuation with debt and borrowing, and expressed the hope that Americans may begin to save once more. That of, course, implies reduced spending.
Here are some excerpts from the article:
“For more than half a century, Americans have proved staggeringly resourceful at finding new ways to spend money……
“But now the freewheeling days of credit and risk may have run their course — at least for a while and perhaps much longer — as a period of involuntary thrift unfolds in many households. With the number of jobs shrinking, housing prices falling and debt levels swelling, the same nation that pioneered the no-money-down mortgage suddenly confronts an unfamiliar imperative: more Americans must live within their means…….
“The long collapse in the United States savings rate is over,” said Ethan S. Harris, chief United States economist for Lehman Brothers. “People are going to start saving the old-fashioned way, rather than letting the stock market and rising home values do it for them.”
“In 1984, Americans were still saving more than one-tenth of their income, according to the government. A decade later, the rate was down by half. Now, the savings rate is slightly negative, suggesting that on average Americans spend more than their disposable income.”
The binge may be done, but get ready for the hangover. The economy has become dependent upon rising borrowing (and therefore indebtedness) to support the increased demand that is key to production’s and employment’s healthy growth. When borrowing slows, however, so does spending. (Note the residential-construction collapse.) And that has always brought recession. This time is no exception.
The following chart captures households’ and businesses’ borrowing binge.
Private Borrowing
(Click on chart to enlarge)
Recessions shaded
Borrowing grew six-fold from the mid-1990s to the middle of this decade. No other decade matches that record. We are about to pay the price.
But what about federal borrowing, the consequence of federal deficits? It’s small potatoes, as the next chart reveals.
Federal Receipts, Expenditures & Deficit
(Click on chart to enlarge)
Recessions shaded
Federal borrowing equals the federal deficit with the sign reversed. When the bottom line in the chart falls into negative territory, that signals deficit spending that must be financed by an equivalent amount of borrowing. The deficit and borrowing reached a maximum of almost $500 billion a few years ago, and may well exceed that record during the forthcoming recession. But federal borrowing remains a fraction of the size of private borrowing.
Meanwhile, the huge growth in private borrowing had a corollary: The surge in America’s international indebtedness and our growing balance-of-trade deficit.
International Trade Balance
(Click on chart to enlarge)
Recessions shaded
This chart depicts our quarterly international trade balance, but you can also use it to estimate our quarterly borrowing from the rest of the world. It shows that lately we’ve been borrowing almost $200 billion quarterly (an $800 billion annual rate). What does that have to do with the private and federal borrowing discussed earlier?
Until recently a portion of American households saved enough to supply all the funds required by private and federal borrowers. Lately our domestic borrowing became so large and our domestic saving so small, that we had to “import” funds from overseas. That puts the quotation in the New York Times article in a different light.
“The long collapse in the United States savings rate is over,” said Ethan S. Harris, chief United States economist for Lehman Brothers. “People are going to start saving the old-fashioned way, rather than letting the stock market and rising home values do it for them.”
Our lack of saving never constrained our borrowing. We merely obtained more of the funds from abroad. The stock market and residential real estate gained value, buoyed – increasingly – by funds flowing in from elsewhere.
There’s another point that bears mention. Contrary to what the quotation implies, capital gains (increasing stock-market and home values) are not the same as accumulated saving. Both increase wealth or net worth. But the person who continues to save during the upcoming recession will continue to see his or her assets grow. Those who relied upon capital gains, and hoped for more of the same, will continue to see the value of their portfolios and homes melt away.
(The charts were taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of Economic Indicators.)
© 2008 Michael B. Lehmann
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