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Minyan Mailbag - Savings Rate

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Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

John,

Is this guy full of it, or does he have a point?

Thanks,
Minyan Michael

Michael,

This is nothing new and sheds no new light on the situation. There is no question we have gone to an asset based society, one that depends on increasing nominal asset prices as a source of income...and that is the key word. Everything he describes is really a substitute for income, which affects savings.

The savings rate is equal to after-tax personal income minus spending. He is saying that if you include as part of income the net increase in asset prices the savings rate is much higher than we realize. This is faulty logic because it ignores a very important element.

His article is misleading in the fact that if you are going to consider increasing nominal asset prices as a source of income, you need to include the increasing liability side as well. He forgets this. An example is home prices: increasing home prices has led many to feel wealthier; they "feel" like they have more disposable income. But equity ownership (home value minus mortgage) is at historically low levels...what people really have is more credit available.

The middle class is getting squeezed because an ever increasing money supply reduces the value of actual income (wages and interest income) that they depend on while increasing the "income" for the rich who own assets. It also puts more and more debt in the hands of the middle class through budget deficits and consumer debt.

So his thesis incorrectly does not discuss the consequences of an asset based society (instead of income based): the real possibility of unsustainable debt. This happens when things get to the extremes, and many of us are wondering if we are there now.

A debt correction (default rates rise to wipe out much wealth) would cause a deflationary spiral at that point. This is what the Fed is so desperate to avoid. The medicine (more easy money) is like chemotherapy: it may work but it is very dangerous. We can service the debt when interest rates are low, but become extremely vulnerable to rising rates. This is what I have been worried about; I would become much more concerned when I see our rates rise here. If it happens, it may happen very quickly.

His only valid point is that savings rates for some other developed countries are too high, like Japan. We need to meet in the middle. This is why Japan would actually benefit from higher interest rates.

Regards,
Prof. Succo

No positions in stocks mentioned.

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