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.
2. A balance sheet item representing what a firm owns.
1. Assets are bought to increase the value of a firm or benefit the firm's operations. You can think of an asset as something that can generate cash flow, regardless of whether it's a company's manufacturing equipment or an individual's rental apartment.
2. In the context of accounting, assets are either current or fixed (non-current). Current means that the asset will be consumed within one year. Generally this includes things like cash, accounts receivable and inventory. Fixed assets are those that are expected to keep on providing benefit for more than one year, such as equipment, buildings, real estate, etc.
109 posted on 01/31/2006 11:07:06 AM CST by x5452
Please, explain how a car does not fit the definition of an asset.
Not exactly, but it does have the effect of increasing your net worth (everything else being equal).
Some advisors say that paying off debt is the same as investing your money and earning whatever the interest rate on the debt is.
Regardless of all the punditry, paying down debt is a good thing, IMHO. "Snowballing" is an effective way to do it, too.
"You can think of an asset as something that can generate cash flow, regardless of whether it's a company's manufacturing equipment or an individual's rental apartment." From the definition.
It depends on how you define savings. The authors claim that money taken from a refi is "savings" begause it improves cash flow is 100% bogus. Cash out refi's are additional DEBT, not savings. Eventually you have to pay that money back.
What we've really seen lately is a shift in the TYPE of savings that most people participate in. I know an incredible number of people who invest in their 401k's and have no other forms of savings. If they were injured or put out of work for several months, they would suffer complete financial devastation because 401k money isn't readily accessible and they have no other money to work with. They essentially live paycheck to paycheck, just setting a little money aside for retirement. In previous generations, money was put aside for retirement as well, but there was ALWAYS savings kept in a liquid form that could be called on in an emergency. I remember one point when I was a kid when my dad was out of work for nearly a year because of an injury. We NEVER suffered any financial problems because of it, because he had a considerable savings set aside for just those kinds of emergencies. That type of thing doesn't happen today.
In many ways, it's because we've become a credit driven society. We no longer think about "saving up" for a big purchase, but instead buy it on credit and pay for it over time. The entire savings ethic has evaporated in the US as easy credit made savings pointless. Of course, we're worse off financially because we now have to pay interest on things that our parents would have simply bought with cash.
I'm not any better than most with this problem, but I do try to put a very small part of my income into savings every month...even if it's just $40 or $50 dollars. If I wanted, I could take six months off work tomorrow, not change my spending at all, and still not have to worry about touching my investments, equity, or retirement accounts. That kind of financial security is increasingly rare today.
"Yes, the percentage has plummeted to 57.1%."
Thanks for the data. It's down about 1%.
I stand corrected. I was sure I had read that all the refinancing fever had produced a smaller equity ratio in homes but those numbers show that it's been about the same for the last few years.
I must admit, your line-of-reasoning amuses me. You post to the forum that A said "B," when asked, A says "no, I said C," and when you are asked why you think A said "B," you pop smoke.
So I guess you ignore the other 3.5 definitions where it is clearly an asset? And how do you figure a car does not generate cash flow. I drive to work, does my car generate cash flow? I'd be fired if I walked to work, it'd take too long.
Not to mention paying an interest rate that is lower than the rate of inflation, and that prior to taxes.
You guys are patient. Some people are apparently unable to grasp freshman level accounting.
No doubt that paying off debt is a good thing - debt is a running liability that mounts with each interest period.
What is "snowballing"?
I think you misunderstood his point.
“understate actual additions to savings by excluding cash flow improvements from realized gains on equities, houses, and mortgage refinancings.”
If you refi from an 8% to a 6% mortgage, you improve your cash flow. If you realize a gain on a stock or on real estate, you have more cash to save.
The entire savings ethic has evaporated in the US as easy credit made savings pointless. Of course, we're worse off financially because we now have to pay interest on things that our parents would have simply bought with cash.
Of course your parents probably had a pension. They probably paid a much lower SocSec tax rate. They received a low return on their savings and had limited access to stock investments.
So now you are attributing your pay check to your car.
(Actually with as little sense as your arguments make that might be the case)
You pay for the car (or incur a monthly payment for it).
Are you now at work? No. You have to pay for GAS first. The car is useless to you unless you pay that fee which is directly proportional to how much transportation you get from the car.
So now we've gone from assets in general to physical assets.
And this related to Savings Rate how?
The context of assets in this case is savings, not physicality.
The left wingers who run the left wing news side of the WSJ often run lies to push the left wing agenda. Here is an example of a big lie of the WSJ re Social Security last year.
http://www.brookesnews.com/050205socialsecurity.html
Why did the Wall Street Journal publish lies about social security?
Dick McDonald
BrookesNews.Com
Monday 2 May 2005
The most liberal front page in America is astonishingly the Wall Street Journal. It quotes more liberal think tanks than any other publication. And sometimes the liberal goo from the front page oozes onto the most conservative editorial pages in America. On Tuesday, April 26, 2005, ex-SEC Chairman, Arthur Levitt, concludes an anti-PRA screed against Bush’s proposal as follows:
I have spent a good deal of my life encouraging Americans to become investors, yet I don't believe Social Security is the way to do so. For me, this is a financial question as much as it is a philosophical one. As a society, are we prepared to replace the basic, guaranteed retirement benefit of Social Security with the potential of greater risk and — to be fair — greater reward of an investment account? Let’s keep Social Security intact, and at the same time, encourage more Americans to invest for their retirements. We can do both..
To be fair to Mr. Levitt, he agrees with Bush that savings are good; encouraging people to invest is good; that the question is a financial one more than a philosophical one. With regard to other points in his conclusion, we part company. Let's review the points:
1. Replace “guaranteed retirement benefit”. Now if I didn’t know better I would assume Arthur had lost his marbles. Bush proposes to replace nothing with an enormous “nest egg”. An amount that will guarantee a comfortable retirement and wealth to pass on to family. Arthur supports the big government Ponzi scheme that may enable retirees to pay for a one-bedroom apartment in retirement and no nest egg, no wealth to pass on. And there is no “guarantee” that by the time kids retire the age of participation in Arthur’s “guaranteed” plan won't be 95.
2. No mention of property rights. Arthur conveniently fails to mention that Bush is pushing to transfer the property rights to a participant's payroll taxes from the government to the individual.
3. Encourage Americans to save. To ask Americans to save is like asking a scorpion not to sting. Our savings rate is scandalous. Arthur's suggestion is ludicrous. The poor won’t save. Bush will force them to and make them wealthy in the process through compounding. An enforced savings plan is a crucial element of making the poor wealthy.
4. “Potential of greater risk”. What is this man talking about. He should work for the New York Times. No one forces anyone to invest in stocks under Bush’s plan. A participant can restrict investments to US Government Bonds. At their average rate of return for the last 40 years, a lower middle-class couple will accumulate over $1,000,000 “nest egg” through compounding. Now I assume the ex-SEC Chairmen would split his pants if he tried to overcome that objection.
5. “Potential of greater risk”. Arthur fails to mention that Bush's plan is voluntary and that those who want to trade a million dollars for a guaranteed one-bedroom apartment are free to do so.
6. “Potential of greater risk”. Arthur shows his true colors when he makes the following statement:
The PSA is not a good investment not just because the odds of coming out behind are high, but also because these investors very likely may have nothing to fall back on if they lose that money.
How the Wall Street Journal prints such lies is beyond me. You can’t lose your money. You can’t speculate under Bush’s plan. Arthur fails to mention that stocks have risen (S&P’s 500 index) 8.5% per year for 56 years. And this liar was the SEC Chairman? Lies distortions and omissions right on the editorial pages of the Wall Street Journal written by a leftist who must take lessons in economics from Krazy Krugman.
Prior to bringing out his sword of deception, Levitt said the following about PRAs (as the Democrat-socialist he is, he calls them PSAs):
But as any financial planner will tell you before committing to any investment option, a plan needs to be judged ultimately by its risks, its potential returns, and how the mix of the two fit the goals of an investor. As currently structured, the PSA plan avoids some of the pitfalls seen when the U.K. undertook a similar reform almost two decades ago. In particular, by limiting investment options and placing its administration in the hands of the federal government, this plan would curb the potential for excessive fees, fraud, and shady sales practices. In addition, by making the default investment for these accounts a life-cycle fund that is both diversified and adjusted to reflect an investor's changing tolerance for risk over their lifetime, the PSA plan decreases the likelihood that novice investors will make spectacularly bad choices.
Arthur should have quit right there as his statement completely contradicts that which follows about risk and fear and fallacy. Now the Wall Street Journal has become complicit in promulgating the continuing Ponzi fraud and careless and irresponsible politicians who sponsor them.
Why doesn't the Wall Street Journal point out that Bush's PRA will painlessly liquidate an $11 Trillion unfunded liability whereas Levitt’s suggestion would have it grow to $25 Trillion and bankrupt our kids. Maybe you have the answers.
Dick McDonald can be found at The Right Scale
What is the purpose of accounting? Is it to show the maximum potential value of all possesions?
Hardly.
It is to enable decision making, based on the direction and magnitude of cashflow.
Loading your balance sheet with 'assets' which fill up equal or larger spaces on your liabilities is the way to retire broke.
A car is a physical asset that can have a positive or negative value. Are you really that dense, or are you simply doing a parody?
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