Posted on 02/01/2006 8:49:13 AM PST by Toddsterpatriot
The Wall Street Journal’s David Wessel wrote last week that “American people, businesses and government don’t save enough.” Citing the Commerce Department’s official U.S. personal savings rate, 0.2 percent, the Los Angeles Times’s Bill Sing wrote, “It doesn’t help that people in the U.S. are spending like there’s no tomorrow.” Sing’s and Wessel’s assumptions are as bogus as the government statistic on which they’re based.
To see why, one need only understand how the government calculates personal savings. Not surprisingly, the calculation is a simplistic one that involves a subtraction of cash outlays from disposable income. David Malpass, NRO Financial writer and chief economist at Bear Stearns, recently noted that savings statistics “understate actual additions to savings by excluding cash flow improvements from realized gains on equities, houses, and mortgage refinancings.” Importantly, the government savings rate either cannot factor in, or would calculate negatively, how Americans purchase the instruments of the wealth that Malpass mentions.
To begin with, 401(k) accounts have become highly popular investment vehicles for Americans over the last 20 years. Since 401(k) deposits come out of pre-tax income, the significant savings built up within those accounts would not factor into government calculations of money saved over outlays.
As for home ownership, mortgage payments are not deducted from pre-tax income, and often are paid out of disposable income. While no one would deny that home ownership is a form of saving, Commerce Department math would put money used to pay down a mortgage into the same basket as money used for everyday consumption.
Even if we didn’t know how savings were calculated, it would still be obvious that a savings rate of 0.2 percent is wildly inaccurate. To see why, consider a variety of statistics about wealth in the U.S.
For starters, the members of the latest Forbes 400 have a combined net worth of $1 trillion, up $45 billion in twelve months. In Merrill Lynch’s 2004 World Wealth Report, the U.S. experienced the biggest jump of any country in terms of high-net-worth individuals, with the number rising 14 percent to 2.27 million. If American’s weren’t savers, the wealth statistics in each case would have fallen.
Someone might reply that the above statistics describe rich people, and that non-millionaires don’t have the means to save like the rich do. Unfortunately, a host of other statistics would also prove an assumption like that wrong.
Indeed, the Securities Industry Association reports that individual participation in the stock market has jumped from 30.2 million in 1980 to 84.3 million in 2002. As the number of investors has grown, so too have stock market returns, with the Dow Jones Industrial average trading at roughly 14 times its low of 743 in 1982.
Home ownership? The rise in home prices is increasingly on the minds of many Americans. That this is so has a lot to do with the fact that at 69 percent, the supposedly “spendthrift” United States has the highest rate of home ownership in its history.
Despite all of the above evidence suggesting a strong culture of saving in the U.S., it can be expected that the “Americans as bad savers” canard will continue to be thrown out by the major media to explain “good” (consumption) and “bad” (trade deficits) economic news.
An optimist would say the mainstream media’s obsession with saving might be a happy signal that its members intend to write more positively about private Social Security accounts, stock options, and other opportunities to save. Sadly, they’ve already demonized stock options, and presumably have only just begun to start scaring readers about the perils of investing their own payroll taxes. Here’s hoping readers start to notice these paradoxical stances, and tune them out altogether.
The Milken Institute economists did a study about 5-6 years ago in which they calculated ALL forms of savings, including home appreciation, Social Security accounts, and so on. They found the U.S. saves as much as any nation except, maybe, Japan. And look at all the good it's done the Japanese.
LOL!! Just don't tell Willie Green.
Your car can't be called savings because it's a depreciating asset. Expenditure for any asset that's acquired for investment should reasonably be called savings. If somebody's investing 14% of his pre-tax income in a 401(k), the income from which is also accumulated on a tax deferred basis, that's definitely long term savings. If you don't think so, you must not have a 401(k). Indeed, once somebody has put 14% of his pre-tax income into a 401(k), there's little left for ordinary post-tax savings.
Principal payments on a house are also legitimately viewed as a form of savings, since most houses are appreciating assets and money used to retire the principal on a note reduces the amount of interest the debtor has to pay. Once a house is paid for it gives the owner a virtual income equal to what he'd have to pay to rent it, plus the opportunity to gain from any appreciation in its value. Economically, it's the same thing as putting the money into a stock that appreciates and pays a dividend equal to the loan's interest rate. As the homeowners equity builds up it can be used to secure other loans, just like any other investment.
Please explain logically why you think these are not forms of savings.
Because they might go down. LOL!
He doesn't meet logic very often. He wouldn't recognize it at this point.
Then do you mean that, if I put after tax money into a savings account, let it build up, and withdraw it to buy stock, that money ceases to be "savings?" Even the government calculations don't go that far. The only differences between 401(k) equity investments and after tax equity investments are that taxes are deferred on 401(k) investments and are not on after tas equity investments, taxation is somewhat different, and there are a number of restrictions on withdrawls from 401(k) accounts. You're arguing a distinction without a difference.
Can he sell the car today for cash? If he can sell it TODAY for more than he owes on the car, he has a postive equity, or in other words a net asset. Its as simple as that.
The car may continue to depreciate, but that it is irrelevant as to whether or not it is an asset. As long as he can sell it for cash (or trade for something else of value) it is in every sense of the word an asset.
Yes you've taken it out of savings to invest.
A 401k is an investment account not a savings account.
A savings account is a type of investment, an investment account is NOT a type of savings.
Why use funds to do it? It fractions your gains. Grab an account and short it yourself, with money you can afford to be wrong with. Invest the rest in Gold, or diversified currencies.
You believe what you want on diversification and shorting and I will do the same.
(You see the word savings in here?)
investment |in?ves(t)m?nt| noun 1 the action or process of investing money for profit or material result : a debate over private investment in road-building | a total investment of $50,000. • a thing that is worth buying because it may be profitable or useful in the future : a used car is rarely a good investment. • an act of devoting time, effort, or energy to a particular undertaking with the expectation of a worthwhile result : the time spent in attending a one-day seminar is an investment in our professional futures.
As opposed to the current estimated value of your sofa and the Xbox360 you play whilst you sit at it.
More important, I asked you to explain logically why money invested in equities is not a form of savings. You have given no logical explanation; all you have done is make a bald assertion that's even at odds with the Government's definition of "savings."
People seem fixated on this government definition of savings and notion that anything not allocated to consumables is savings.
I have already explained why logically it's not savings; its not protected. At least cash held in savings account isn't subject to daily fluctuations. Cash invested in stocks is.
There are far too many folks who wake up, heck their current portfolio value and say 'wow I've saved a ton of money, look at all my savings in my stocks', then the next day there's some piece of bad news and they are crying that thy've lost money. Neither are true you've neither profited nor lost until you sell. If the princible investment is not protected it isn't savings.
Then of course we have mutual funds, the problem with these however is that in instances of major market changes it's far too tough to get out of these before incuring a loss and without fees for getting out. If the princible investment is not protected it isn't savings.
Calling these non protected investments savings is naive, and the government calling them such is deceptive.
The government has been making stupid assumptions about stocks being savings for years. The same act which gave birth to the IRA gave birth to one of the stupidest and most anti-market policies. At a specific age all 401k holders must begin withdrwing from their plan. Thus when all the babyboomers with 401ks hit that age (I beleive its 70) an enormous class of folks MUST beging liquidating their market holdings.
Does that sound good for the market to you?
This may be where we're going wrong-- definitions. If we're using the same language then we're working together instead of quarrelling. Let's agree on definitions. I found some standard definitions at U Mich:
| Wealth | The total value of the accumulated assets owned by an individual, household, community, or country. | ||
| Asset | An item of property, such as land, capital, money, a share in ownership, or a claim on others for future payment, such as a bond or a bank deposit. | ||
|
1. The plant and equipment used in production. 2. One of the main primary factors, the availability of which contributes to the productivity of labor, comparative advantage, and the pattern of international trade. 3. A stock of financial assets. |
||
| Bond | A debt instrument, issued by a borrower and promising a specified stream of payments to the purchaser, usually regular interest payments plus a final repayment of principal. Bonds are exchanged on open markets including, in the absence of capital controls, internationally, providing a mechanism for international capital mobility. |
We don't have to use these definitions -- if you want we can go off to stuff like "true wealth is the spiritual" or something. I'm happy either way. Your call.
The definition of Walth is anything but standard. And any definition which includes assets with associated liabilities and/or debt greater than the value of the asset is quite useless. Here's some of the definitions found at various universities:
While the dictionary definition of wealth is connected with affluence—having an abundance of money, Schuchardt says wealth is “about having enough money to be financially secure. The concept of financial security means you are first, financially independent, or out on your own; then financially stable, or able to meet day-to-day expenses; and finally, able to save, invest, and control debt in order to reach future goals that take money to buy, such as a home, a college education and a comfortable retirement.” Schuchardt, a former senior fellow with the National Endowment for Financial Education, suggests these simple tactics:
http://www.utah.edu/unews/releases/04/mar/wealth.html
Our definition of wealth includes business assets and non-residential properties. We are interested in looking at the assets of these households that can be expected to generate a stream of income that can be used to finance consumption during retirement.
http://siepr.stanford.edu/papers/pdf/03-10.pdf
Program, we assume that utility is a function of wealth, that utility always increases with wealth, but that the marginal utility of wealth decreases as wealth increases. The goal of the consumer is to maximize
expected lifetime utility. Utility is assumed to be a function of wealth. The definition of wealth can be a sticky issue, but initially we can think of a retired person whose only source of income is perfectly liquid,
perfectly safe financial assets
.
Relative Risk Aversion
Utility functions can be characterized in terms of relative risk aversion, which is the same as the wealth elasticity of the marginal utility of wealth (Blume & Friend 1975). Relative risk aversion can be plausibly
assumed to be constant for any person over usual ranges of wealth. Kimball (1988) has provided a nice intuitive illustration of the concept of relative risk aversion, appropriate for utility functions with constant
relative risk aversion.
http://hec.osu.edu/people/shanna/741/hannaSunposterhandout.pdf
A. Definitions of wealth, expected returns and unexpected capital gains:
Given the definition of wealth in (1), the expected total return can be written in terms of yield and expected capital gain:
http://www.amherst.edu/~grwoglom/EndowmentSpendingRev.doc
You're free to state your preferred definition or if you don't like any possible existing static definitions, that's fine too. Lots of good people make up definitions in mid sentence. I find it less work to use the definitions from U Mich, they serve well when working in financial careers such as mine. I can understand how someone else could define wealth as anything they want just to win an argument. I find it too much work to switch definitions when going from work to worship or home.
I don't think when discussing saving that the definition of wealth should be structured so that it can hide debt in excess of assets held.
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