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Tuesday, September 01, 2009


cash savings

via barry ritholtz at big picture, mark warywoda of addenda capital on the state of the consumer.

So far, all we have had is a two-quarter bump up in personal savings rates — that is trivial related to the outstanding debt burden. The debt-to-income ratios have barely budged, given that income had fallen at the same time that spending had fallen.

How is it was possible that debt-to-income ratios hadn’t improved much when the savings rate had gone up to 5%? The short answer is it comes down to the simple equation: Savings = DPI – personal outlays.

A true savings rate should compare personal outlays to only the portion of personal income that’s actually spendable (ex supplemental benefits). A savings rate computed on that basis remains stubbornly very negative. And debt burdens remain atrociously high, at a time when incomes and asset values remain under pressure.

Until about 1970, personal outlays (dominated by Personal Consumption Expenditures (PCE) (96.6%), but also including interest payments and transfer payments) were consistently held under the amount of cash receipts — but not in recent decades.

While the official personal savings rate has always been positive, though trending down over time since 1982 until 2008, the unofficial personal savings rate has trended down since WWII, turning negative in the 1970s, and exceeding -10% for much of the 2000s . . .

Economic growth has increasingly relied on debt growth. The government is trying to preserve economic growth by levering up to fill the void left by private sector deleveraging. But will it be able to do so for as long as house-holds need to continue to delever? Consumers over-consumed for years (because they could — because of housing “wealth”, MEW and excessive leveraging). Leverage allowed consumers to, over the course of the decade, basically get a bonus year’s worth of spending relative to pre-2000 historical spending norms.

note how the cash savings rate went negative more or less exactly as the great leveraging began in the late 1970s. one is of course a function of the other.

this is hardly new news, but i think it gives a better look at the amount of balance sheet repair that stretches out before the american household looking forward. rebuilding the savings base of the country is going to be a difficult and painful job, no matter how it's handled.

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