The Savings-Rate Myth (Bogus assumptions based on a bogus government statistic)

NRO Financial ^ | Dec 23, 2004 | John E. Tamny

[Toddsterpatriot]

To: Toddsterpatriot
(From investorpedia):
1. A resource having economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit.

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.

[Disambiguator]

Is paying down debt the equivalent of savings?

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.

[x5452]

"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.

[Arthalion]

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.

[webstersII]

"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.

[1rudeboy]

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.

[Toddsterpatriot]

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.

[JoeFromSidney]

"Saving differently". Exactly. Why should anyone park significant funds in interest bearing accounts that not only lag the return in stocks, real estate but are taxed every year as income as well?

Not to mention paying an interest rate that is lower than the rate of inflation, and that prior to taxes.

[somniferum]

You guys are patient. Some people are apparently unable to grasp freshman level accounting.

[thoughtomator]

No doubt that paying off debt is a good thing - debt is a running liability that mounts with each interest period.

What is "snowballing"?

[1rudeboy]

Do you think x5452 understands that most (if not all--I simply don't know if there is an exception) physical assets depreciate, and that depreciation is an expense? Do you think that might be the source of his confusion, thinking that something such as a car only qualifies as an asset if it cannot/does not depreciate?

[Toddsterpatriot]

The authors claim that money taken from a refi is "savings" begause it improves cash flow is 100% bogus.

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.

[x5452]

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.

[x5452]

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.

[Grampa Dave]

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

[x5452]

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.

[1rudeboy]

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?

[Arthalion]

Assets are only those things that give you positive cash flow,

Actually, he just got his terminology wrong. Assets are things that have positive VALUES...and for most people, cars are NOT assets. My own car has an appraised value of around $16,000 right now, but I still owe $18,000 on it. It's contribution to my net worth is -$2000, making it a liability, not an asset. It's debt, not savings.

Personally, I can't remember the last time I spoke with someone who actually bought a new car for cash. Practically all new auto sales are financed, and most used cars are financed as well, meaning that very few of them qualify as assets. An asset is something that you can PROFIT from if you SELL them, or that generates positive cash flow.

By the time a car is paid off enough to have it qualify as an asset, it's value has typically depreciated so much that it's a negligible asset at best. When looking at the lifetime economic health of an individual, cars are ALWAYS liabilities. It's almost impossible to regain your investment from an automobile, and they cause a net reduction in your lifetime savings. Unless you're investing in old Auburns and Duesenberg's, cars are one of the worst "investments" a person can make.

[1rudeboy]

Oh crap. I'm in it now. I just re-read my comment #77 and realized that x5452 tomorrow will claim that I said a car is "savings."

[Grampa Dave]

"While the editorial page of The Wall Street Journal is conservative, the newspaper's news pages are liberal, even more liberal than The New York Times." http://www.newsroom.ucla.edu/page.asp?RelNum=6664 Media Bias Is Real, Finds UCLA Political Scientist Date: December 14, 2005 Contact: Meg Sullivan ( msullivan@support.ucla.edu ) Phone: 310-825-1046 While the editorial page of The Wall Street Journal is conservative, the newspaper's news pages are liberal, even more liberal than The New York Times. The Drudge Report may have a right-wing reputation, but it leans left. Coverage by public television and radio is conservative compared to the rest of the mainstream media. Meanwhile, almost all major media outlets tilt to the left. These are just a few of the surprising findings from a UCLA-led study, which is believed to be the first successful attempt at objectively quantifying bias in a range of media outlets and ranking them accordingly. "I suspected that many media outlets would tilt to the left because surveys have shown that reporters tend to vote more Democrat than Republican," said Tim Groseclose, a UCLA political scientist and the study's lead author. "But I was surprised at just how pronounced the distinctions are." "Overall, the major media outlets are quite moderate compared to members of Congress, but even so, there is a quantifiable and significant bias in that nearly all of them lean to the left," said co‑author Jeffrey Milyo, University of Missouri economist and public policy scholar. The results appear in the latest issue of the Quarterly Journal of Economics, which will become available in mid-December. Groseclose and Milyo based their research on a standard gauge of a lawmaker's support for liberal causes. Americans for Democratic Action (ADA) tracks the percentage of times that each lawmaker votes on the liberal side of an issue. Based on these votes, the ADA assigns a numerical score to each lawmaker, where "100" is the most liberal and "0" is the most conservative. After adjustments to compensate for disproportionate representation that the Senate gives to low‑population states and the lack of representation for the District of Columbia, the average ADA score in Congress (50.1) was assumed to represent the political position of the average U.S. voter. Groseclose and Milyo then directed 21 research assistants — most of them college students — to scour U.S. media coverage of the past 10 years. They tallied the number of times each media outlet referred to think tanks and policy groups, such as the left-leaning NAACP or the right-leaning Heritage Foundation. Next, they did the same exercise with speeches of U.S. lawmakers. If a media outlet displayed a citation pattern similar to that of a lawmaker, then Groseclose and Milyo's method assigned both a similar ADA score. "A media person would have never done this study," said Groseclose, a UCLA political science professor, whose research and teaching focuses on the U.S. Congress. "It takes a Congress scholar even to think of using ADA scores as a measure. And I don't think many media scholars would have considered comparing news stories to congressional speeches." Of the 20 major media outlets studied, 18 scored left of center, with CBS' "Evening News," The New York Times and the Los Angeles Times ranking second, third and fourth most liberal behind the news pages of The Wall Street Journal. Only Fox News' "Special Report With Brit Hume" and The Washington Times scored right of the average U.S. voter. The most centrist outlet proved to be the "NewsHour With Jim Lehrer." CNN's "NewsNight With Aaron Brown" and ABC's "Good Morning America" were a close second and third. "Our estimates for these outlets, we feel, give particular credibility to our efforts, as three of the four moderators for the 2004 presidential and vice-presidential debates came from these three news outlets — Jim Lehrer, Charlie Gibson and Gwen Ifill," Groseclose said. "If these newscasters weren't centrist, staffers for one of the campaign teams would have objected and insisted on other moderators." The fourth most centrist outlet was "Special Report With Brit Hume" on Fox News, which often is cited by liberals as an egregious example of a right-wing outlet. While this news program proved to be right of center, the study found ABC's "World News Tonight" and NBC's "Nightly News" to be left of center. All three outlets were approximately equidistant from the center, the report found. "If viewers spent an equal amount of time watching Fox's 'Special Report' as ABC's 'World News' and NBC's 'Nightly News,' then they would receive a nearly perfectly balanced version of the news," said Milyo, an associate professor of economics and public affairs at the University of Missouri at Columbia. Five news outlets — "NewsHour With Jim Lehrer," ABC's "Good Morning America," CNN's "NewsNight With Aaron Brown," Fox News' "Special Report With Brit Hume" and the Drudge Report — were in a statistical dead heat in the race for the most centrist news outlet. Of the print media, USA Today was the most centrist. An additional feature of the study shows how each outlet compares in political orientation with actual lawmakers. The news pages of The Wall Street Journal scored a little to the left of the average American Democrat, as determined by the average ADA score of all Democrats in Congress (85 versus 84). With scores in the mid-70s, CBS' "Evening News" and The New York Times looked similar to Sen. Joe Lieberman, D-Conn., who has an ADA score of 74. Most of the outlets were less liberal than Lieberman but more liberal than former Sen. John Breaux, D-La. Those media outlets included the Drudge Report, ABC's "World News Tonight," NBC's "Nightly News," USA Today, NBC's "Today Show," Time magazine, U.S. News & World Report, Newsweek, NPR's "Morning Edition," CBS' "Early Show" and The Washington Post. Since Groseclose and Milyo were more concerned with bias in news reporting than opinion pieces, which are designed to stake a political position, they omitted editorials and Op‑Eds from their tallies. This is one reason their study finds The Wall Street Journal more liberal than conventional wisdom asserts. Another finding that contradicted conventional wisdom was that the Drudge Report was slightly left of center. "One thing people should keep in mind is that our data for the Drudge Report was based almost entirely on the articles that the Drudge Report lists on other Web sites," said Groseclose. "Very little was based on the stories that Matt Drudge himself wrote. The fact that the Drudge Report appears left of center is merely a reflection of the overall bias of the media." Yet another finding that contradicted conventional wisdom relates to National Public Radio, often cited by conservatives as an egregious example of a liberal news outlet. But according to the UCLA-University of Missouri study, it ranked eighth most liberal of the 20 that the study examined. "By our estimate, NPR hardly differs from the average mainstream news outlet," Groseclose said. "Its score is approximately equal to those of Time, Newsweek and U.S. News & World Report and its score is slightly more conservative than The Washington Post's. If anything, government‑funded outlets in our sample have a slightly lower average ADA score (61), than the private outlets in our sample (62.8)." The researchers took numerous steps to safeguard against bias — or the appearance of same — in the work, which took close to three years to complete. They went to great lengths to ensure that as many research assistants supported Democratic candidate Al Gore in the 2000 election as supported President George Bush. They also sought no outside funding, a rarity in scholarly research. "No matter the results, we feared our findings would've been suspect if we'd received support from any group that could be perceived as right- or left-leaning, so we consciously decided to fund this project only with our own salaries and research funds that our own universities provided," Groseclose said. The results break new ground. "Past researchers have been able to say whether an outlet is conservative or liberal, but no one has ever compared media outlets to lawmakers," Groseclose said. "Our work gives a precise characterization of the bias and relates it to known commodity — politicians."