Guest Post: The Decline Of The American Saver And The Economy

Tyler Durden's picture

Submitted by Lance Roberts of Streettalk Advisors

The Decline Of The American Saver And The Economy

In the most recent release of the Personal Income and Disposition report by the Bureau of Economic Analysis the headline numbers were seemingly very good with personal consumption expenditures up 0.7% and personal incomes rising 0.3%.    Unfortunately, that is about where all the good news ended.

We have been discussing as of late in previous articles about the dynamic change that has taken place since 1980 in our country.   There is almost a clear demarcation line that exists at the end of the 70's as we shifted from a manufacturing and production society to a financial and service based society.    No matter how you look at it - whether through GDP, debt, incomes, savings or consumption; beginning in 1980 there is a clear decline in the quality of financial health of both individuals as well as the country.


 
You can see this clearly in the current release of the personal income and disposition figures.   In 1980, the year over year change in personal incomes hit their highest peak at almost 12%.   Personal incomes had been steadily rising since 1959.   Not surprisingly, there is a very high correlation between the year over year change in incomes and personal consumption expenditures.

This change in income and spending behavior can be, in my humble opinion, directly tied to the increases in productivity through technological innovation which has impacted incomes but it was the deregulation of the financial industry over the last 30 years that most affected consumer behavior.    The later is the most important point for this discussion.   

During this time frame the consumer, due to enticements from the financial industry for easy credit, a booming wealth effect from the stock market and then housing, and a easy and accommodative monetary policy, shifted from a "save and then spend" society to a "spend and pray" society.   This is clearly seen in the decline of the personal savings rate.  The vertical black line notes the apparent shift in consumer behavior.  The difference between pre- and post-1980 was productive investment.

Productive investment comes from savings which leads to stronger economic growth.   This is most clearly seen in the steady decline of GDP as compared to Personal Savings.  As consumers migrated from saving and productive investment the output of the economy has likewise declined.   As Americans became addicted to a lifestyle they could not really afford the need for "fast money" became ever more apparent.   The "greed factor" was then fed upon by the financial institutions that were more than happy to increase the leverage cap on consumers.   This in turn led to the eventual bust in 2000 and then again in 2008.    The government, via the Fed, was also complicit in this turn in the average American by fueling speculative excesses through easy monetary policies and excess liquidity.

 

So, now that you have the background to this story - let's take a closer look at the income and disposition numbers starting with the income side of the equation.    Where did the income increase come from?   It wasn't coming from wage increases as shown.   This, of course is really not much of a surprise considering that the whole increase in corporate profitability came from cost cutting (lower headcounts) and increased productivity (employees doing more for less money).   This, of course, is not a sustainable trend which is why we are deeply concerned about corporate profit margins in the coming quarters - however, I digress.

The most telling increases to personal income have come from government transfers (welfare, unemployment, etc.) and some of the lowest taxes as a percent of income on record (recent payroll tax cut for example).   While this artifical boost has come at a much needed time these are again artifical stimuli and are transient in nature.   For a long term economic recovery real wages need to increase in order to support longer term consumption patterns that are traditionally supportive of a growth economic structure - this includes an increase in personal savings.   In more simplistic terms - America needs to get back to the point where it saves more than it spends.

However, that brings us to the disposition part of the consumption function.   If consumers are earning less on a prorata basis but spending is increasing, then where is that consumption flowing to?    The chart shows the percentage change in the actual dollars (seasonally adjusted) spent in the PCE report on food and energy relative to disposable personal income.   Not surprisingly since the bottom of the "official" recession - food and energy have been rising fairly sharply and the trend since 2000 has been a larger portion of the disposable budget being eaten (literally) by these two areas.   This, of course, reduces the overall growth in disposable personal income and when the family budget is already under duress this leads to cuts in overall consumption trends.
 
The bottom line, and as shown in our final chart is that previous to 1980 when our economy was built around a balanced consumer - consumer savings ranged around 8%, GDP was growing and consumer spending averaged between 61-63% of the economy.   Post 1980 - as the introduction of leverage and financial charades took the place of common sense; consumption has been steadily increasing to over 70% of the economy today while GDP has been steadily declining to the whopping 3% average GDP environment that we are trapped in today.

The problems that exist today are a function of America, as a whole, losing sight of what brought this country to its feet.   A generation of savers and investors (individuals that took capital and built something with it) has turned into a generation of gamblers and speculators in many regards trying to build wealth through service based programs and financial transactions that generate little or no economic throughput. The end result will be a malaise of economic growth into the future plagued by higher levels of real unemployment, a weaker financial system as 78 million baby-boomers become net capital extractors and higher interest rates and inflation caused by excessive liquidity and theoretical monetary policy.

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TIMMAYYY's picture

buy a ticket outta there...nice knowing you america,

You wouldn't think so judging by the media image they pump around the world about what america is like.

Mr Lennon Hendrix's picture

Plenty of guns.  Not that much silver.  I am sticking with the catch phrase I came up with.

unwashedmass's picture

 

yeah, and then, there's the bunch of us so terrified by what Ben is doing that we've taken out wealth out of the system and put it into gold and land....

Mr Lennon Hendrix's picture

Does the Pope dress up like a liberty cap mushroom?

depression's picture

NO, I wouldn't know the truth if it stepped on my foot.

My daily meditation is: Shoot first and ask questions later.

francis_sawyer's picture

Does this sound like a Geico commercial?

TBT or not TBT's picture

Does a doomer meme collect no moss?

MX_DOGG's picture

Man I hope this site doesn't get bought. just sayin..

Long-John-Silver's picture

I convert my FRN's to physical Gold and Silver as soon as I get them no matter the current price. Am I the problem?

Strider52's picture

No wonder personal spending is up. Gas and food cost a lot more nowadays.

 I just bought a silver (and black) gun. I already have silver & gold, plenty of canned food, bought at 1/2 the current price. Hey, does that make stored food an inflation-hedge?  Now I gotta go get 10-20 of those monster plastic water bottles.

RafterManFMJ's picture

I buy sardines by the 12 pack on Amazon. In Olive Oil. MMmmm. Bought 3 packs last year for 19.95 per, and just got on last night to buy some more. On Aug. 17 of last year, I paid 19.69. Today, they are 28.73. Holy Smokes! I can no longer afford sardines, probably to my co-workers delight.

 

Mr Anderson's picture

Do you live in a rural area as well?

Do you have a well?

The easiest prepartion is location.

 

TBT or not TBT's picture

Or you can live in a city, and have plenty salt stored for human meat preservation.

Mr Anderson's picture

haha, to each his own.

I prefer-

Beef, venison, turkey, salmon, trout, fruit, and vegatables.  (lets not forget wine)

At least we know your a true survivor TBT.

trav7777's picture

working and saving has been a fool's game for 30 years.

If you speculated and spent, you came out far ahead.  This is a direct consequence of the financialization of the economy.

Why produce anything when you can participate in a ponzi scheme run by the government?

Mr Lennon Hendrix's picture

What matters is what you spend on.  If you bought a house in Tokyo, then you fucked up.  If you bough land in L.V. you did too.  If you bought silver at $5, well, the rest is in the books.

depression's picture

Is buying silver at $ 7 spending money ?!!???

The nice thing about silver is, as long as you do not sell it, you pay no taxes on the gains.

Bicycle Repairman's picture

" If you bought silver at $5, well, the rest is in the books."

Silver covers the last 10 years.  What about the previous 20 years? Even if you were smart/lucky enough to grab gold and silver in 2002, it is still not enough.

What can you say about a system that made "working and saving [...] a fool's game for 30 years."

SteveNYC's picture

With ever-declining interest rates and (as you said) the financialization/Ponzification of the economy, the "saver" has been raped almost to his/her/its last penny in the US. Unless you are part of the uber-wealthy, the "saver" is almost extinct. The only way to save is in PM's or offshore. Saving in the US is a non-starter.

Encroaching Darkness's picture

I think you've hit on it - the savings IN AMERICA of American households is probably pretty small - after all, you're taxed when you earn it, the interest is taxed as it's earned and the distributions are taxed when they come in. The only way to avoid negative returns is to invest overseas, in PMs or something that the Feds can't steal and waste (like they stole and wasted the SS contributions).

No one with a working brain would play a casino where the house is so rigged against the bettors, so OF COURSE savings IN AMERICA are down - if you have any sense, you're refusing to lose by refusing to play!

 

aerojet's picture

None of the spendthrifts went through any such rational decision-making when they decided to hit the gas on spending.  It just felt good.  As far as the rest of your bs statements, let me only say this:  People who do not save get fucked because at some point down the road, your entire life grinds to a halt due to an illness or other emergency and you had better have cash saved for that time.  So if you were to say that the Fed and the Government is robbing Americans of their security, well, that is correct, but it is incorrect to say that saving for the future is stupid or a fool's errand.  All that you are really doing is making excuses about why you're not changing your behavior to get in line with the new reality.  They squeeze you, you have to cut more spending so  that you always have something set aside for the big rainy day.

Bicycle Repairman's picture

"it is incorrect to say that saving for the future is stupid or a fool's errand.  All that you are really doing is making excuses about why you're not changing your behavior to get in line with the new reality."

I have saved 20%+ of my wages every year for 30 years, and I am telling you that working and saving has been a fools game.

Pseudo Anonym's picture

Why produce anything when you can participate in a ponzi scheme run by the government?

are you having fun yet?  That's what I want to know.

LawsofPhysics's picture

Translation; the financial sector of the American economy (which produces NOTHING of real value but owns your politician) remains a cancer on the broader sections of the economy.  What to know why companies and individuals that actually add real value to the economy are not spending?  Simple, they are tired of supporting the cancer.  FYI, the cancer gets it's money via the government and taxpayer rape.

NotApplicable's picture

So, Trav succinctly states the nature of the world's economic problem, and all you want to know is if he's having fun? Really?

As long as his question remains valid, there are no solutions to life's problems. Also, add to Trav's question the fact that the producers are the target of the ponzi, making the "Why?" all the more relevant.

I realize that sparring with Trav is considered sport around here, but don't let it blind you to any valid questions he may present, as that makes Baby Jesus cry, and in this case, aids the criminal perpetrators.

Pseudo Anonym's picture

all you want to know is if he's having fun? Really?

it comes down to complicity. Do I want to have fun swimming with the big fish ("aid the criminal perpetrators" - as you put it) defrauding savers or do I choose not to be a part of the ponzi scheme and not have fun.  That's the succinctly stated and valid question.  Isn't it?

Bicycle Repairman's picture

" Do I want to have fun swimming with the big fish "

Are you actually saying that little fish can swim with the big fish?  Are you saying the playing field is level?

Pseudo Anonym's picture

Are you actually saying that little fish can swim with the big fish?

yes, I am - using Trav7's definition.  If the majority, the likes of Trav, were not participating in the ponzi scheme, we would not be in this pickle.  Would you not agree with that?

Bicycle Repairman's picture

If the majority did not participate we would not be here now.  But it is a little more complicated than that.  The rewards for participating (for the better part of 30 years) were substantial.  Those who did not participate got quite the opposite.

But ultimately the laugh is on everyone, except those who played, blew up and got bailed out.  And they knew in advance that they would get bailed out.  And why not?  They were doing G-d's work.  As opposed to me, satan's henchman, I suppose.

/sarc

Pseudo Anonym's picture

Those who did not participate got quite the opposite.

Those who did not participate (I was not one of them) and "knew in advance" (I was not one of them) were converting hofjuden fiat to PM and are now (or soon to be) set for two lifetimes.  Needless to say, only those at the top of the pyramid "knew in advance".  You have a valid point, nevertheless,  given only few knew.  However, that is not a reason to glorify Trav's summary of the situation today.

Bicycle Repairman's picture

"However, that is not a reason to glorify Trav's summary of the situation today."

Trav's point is dead on, IMO.  I've been living it for 30 years.  That is several levels above believing my own lying eyes.

Robot Traders Mom's picture

The ponzi only works until it doesn't. Millions upon millions of schleps are going to be left holding the bag and it won't be pretty...

10kby2k's picture

 

How would you have avoided getting booted off the ponzi in the 2 market crashes in last 11 years? 

 

TruthInSunshine's picture

If you speculated and spent, you came out far ahead.  This is a direct consequence of the financialization of the economy.

 

Everyone I know, and I know quite a few, who followed your suggestion, are now either broke dicks (after being virtual kings), or are well on their way.

Liquidity is king. Debt is suicide. Always was. Always will be.

Everyone will soon see that this crisis ends the same way all other crises ended before. Harvest time is coming, and it's going to be painful for those not liquid.

aerojet's picture

Exactly right and perfectly said.  Any other opinion on this matter is a rationalization of some kind.

LauraB's picture

Great article!  Well said!

The only way for the economy to recover is to flush the bad debt from the system (making those who were responsible for it -- i.e. banks and borrowers -- responsible for the losses rather than pushing it off onto current taxpayers and future generations) and encourage savings rather than borrowing.  We also need to end the Fed so that our savings are not dilluted by money printing.

TruthInSunshine's picture

I just applied for The Bernank Card.

It's a new credit card that lets me buy shit for 1/4 of one percent interest, roll over the principal as often as I'd like, and my minimum monthly payment is $5.

Oh, there's no credit limit, and if I ever default, The Bernanke guarantees my obligations.

Everyone should have one of these The Bernank Cards. They're very nice to have.

kaiserhoff's picture

+ Don't think of it as money.  It's only magical beans.

SubjectivObject's picture

The Bernank America Card

You may have a viable trademark there.

I am Jobe's picture

Buy silver and guns and food. Nothing else needed. Avoid SLV, another manipulated crap by Whore Street.