subject: The Recession and the New World Reality, Pt 1 [print this page] What Happened to Us? What Happened to Us?
These are serious times meant for rigorous thinking and you will notice the tone of my next couple of articleswill be a little more somber than usual.
I will say that you should ignore any advice you receive, whether in person or from "experts", that saving more money during this time of recession will hurt the economy. Now is the time to realize what some baby boomers and previous generations knew all too well. Save your money for emergencies, security, and retirement because lean times will come. It is not a matter of if but when.
For three decades, from the 1960s to the 1990s, the personal savings rate in the US was around 9% of after tax income (not of gross income). In the 1990s we stopped saving money due to rising home equity and a rising stock market. The savings rate dropped to less than 1% of what it was in the previous three years. The bottom line is that we started financing our lives beyond our ability to pay our debts. At the same time, the Government was doing the same. The end result of this mental shift is the perfect formula for a national financial meltdown. We were banking on our economy always increasing and never saved enough for when the good times stopped rolling.
American consumers as a group are several trillion dollars in debt and the national debt is in the tens of trillions. Those of you who have been to Times Square in New York may remember the "debt clock". It wastaken down not long ago because it was never designed with the thought that our national debt would ever exceed $10 trillion!
We in the U.S. have become lousy savers compared with other industrialized nations. The 0.4 percent of disposable income that U.S. households saved last year compares with 10.9 percent for Germany and 3.1 percent for Japan. This is according to theOrganization for Economic Cooperation and Development OECD.
In the long run, dramatically higher personal savings back to the early 1990 levels would be good news for the U.S. economy, because the extra money would help put household finances on a firmer footing and lessen U.S. dependence on investment by China and other foreign countries to finance our economic growth. In addition, retailers would still have consumers who are capable of making purchases during tough times without incurring additional debt. Retail outlets do not relish their clientele having to stop purchasing because they are out of work, out of credit, and broke.
In the short term though, it will likely mean wrenching changes for companies that have become reliant on rapidly growing consumer spending. Some firms have already begun cutting back to bring operations in line with lower demand.
Using China to fund growth has been promoted a popular financial strategy by a host of TV "talking heads" but the bottom line is why would you want to mortgage the country's financial future to another nation instead of using intelligent revenue management to accomplish the same goal? Lack of discipline and the need for immediate gratification is the reason why we are in this position in the first place. Why not tighten our belts for the short term and come out better in the long run without incurring massive loads of additional national debt.
Recently the personal savings rate has started to improve as wesaved about 4% last month. This is more than double what it was just a few years ago. At the same time consumer borrowing fell about $8 billion last month, which is the largest drop since the 1940s when they started measuring this statistic.
Unfortunately over the last couple of decades we have engineered the economy to use consumer borrowing to drive our economy. Consumer borrowing drives 72% of the economy! Do yourself a favor and visit thehttp://www.usa.gov/ site and get to understand what is happening to you.CNN Money andBloomberg are two excellent sites also. These sites are where I find my statistics and keep an eye on the current state of our economy.
Here is some food for thought
Former U.S. Federal Reserve ChairmanPaul Volcker in an interview withPBS's Charlie Rose states that, "with globalization, automation, flawed public policies, inadequate regulations, over consumption, the availability of foreign capital, and even greed, the United States embarked on a financing boom creating an increasing array of creative and untenable mortgage types, accompanied by an equally problematic set of mortgage backed securities. It generated an unsustainable housing bubble, which ended as all bubbles do badly triggering the global financial crisis."
I'm not an economist but this doesn't sound like a smart fiscal policy. It does; however, appear to be a plausible explanation for the disastrous financial meltdown we are in.
The Prescription I propose is simple: the right attitude, tight budgeting, preparedness, and self-discipline. I will expound more on this topic in the next issue:
