Sunday, January 11, 2009

Wall Street Journal: Hard Hit Families Finally Start Saving, Aggravating Nation's Economic Woes

I am not saying this front page story in the Wall Street Journal sounds familiar ... but...

[Dec 29: What Happens if America Returns to a Historical Savings Rate?]

As Uncle Ben Bernanke sits here and destroys American savers (just imagine the 65+ crowd trying to live on these CD interest rates) the master plan is to return Americans to spenders so we can kick the can down the road. But what if Americans do what is best for themselves (save) and not for the "service based economy" (spend like drunken sailors)? What happens if we don't return to 0 to 2% saving rates but seeing the increasing lack of job stability and stock market shenanigans (where many of our retirement savings are) - not to mention a country that should have anywhere from 1 in 4 to 1 in 3 people "underwater" on their homes by this time next year - turn back to our REAL "old habits"?

For us economic folk - we call this the "Paradox of Saving"

The paradox of thrift (or Paradox of Saving) is a paradox of economics propounded by John Maynard Keynes. The paradox states that if everyone saves more money during times of recession, then aggregate demand will fall and will in turn lower total savings in the population. One can argue that if everyone saves, then there is a decrease in consumption which leads to a fall in aggregate demand and thus leads to a fall in economic growth.

It's sort of a serious bummer. The solution?? Another of Keynes theories - government spending to take up the slack! (Keynes is a very popular guy nowadays). The problem with that idea in America is (a) we're dead broke and (b) once a federal government job is created, it will never die. Taxpayers will be on the hook for these jobs forever.

We asked for decades how Americans could possibly keep spending through recession or expansion... how it never seemed to end. "Never doubt the American consumer"! I ask you to doubt him/her this time around since this is the first consumer led recession in 25 years. We're going to be busy "right sizing" this economy in the next 3-4 years.

On to the Wall Street Journal piece... aka why you cannot cram down debt down Americans throats even at 0% aka why the housing market won't be booming anytime soon aka the economic recovery will be muted when it does come aka why most institutional investors continue to live in a dream world of ivory towers.

But... repeat to yourself "There's no place like Independence Day" ... "There's no place like Independence Day" as we look forward to the recovery "in 6 months" (I'm giving you 7 just to be safe!)
  • U.S. household debt, which has been growing steadily since the Federal Reserve began tracking it in 1952, declined for the first time (that would be ... the first time EVER since 1952) in the third quarter of 2008. In the same quarter, U.S. consumer spending growth declined for the first time in 17 years.
  • In the American buying spree of recent years, the most profligate spenders were those under 35. As recently as 2006, for every $100 these Americans earned, they spent about $117. (ah, I know these people well) Those aged 35 to 55 had negative saving rates nearly as large. Only the large number of Americans 55 and older, who have always had high double-digit saving rates, kept the overall saving rate above zero, according to data from Moody's and the Federal Reserve. (gooo team 55+!)
The story then moves on to lovely Boise, Idaho....
  • Rick and Noreen Capp recently reduced their credit-card debt, opened a savings account and stopped taking their two children to restaurants. Jessica and Alan Muir have started buying children's clothes at steep markdowns, splitting bulk-food purchases with other families and gathering their firewood instead of buying it for $200 a cord.
  • But this same thriftiness, embraced by families across the U.S., is also a major reason the downturn may not soon end. Americans, fresh off a decades long buying spree, are finally saving more and spending less -- just as the economy needs their dollars the most.
  • Usually, frugality is good for individuals and for the economy. Savings serve as a reservoir of capital that can be used to finance investment, which helps raise a nation's standard of living. But in a recession, increased saving -- or its flip side, decreased spending -- can exacerbate the economy's woes. It's what economists call the "paradox of thrift."
Institutional investor & strategists i.e. thesis mongers - hate talk like this below
  • "The idea that the American family will quickly spend us out of this recession is a fantasy. It won't happen," said Elizabeth Warren, a professor of law at Harvard University
Shhh Ms. Warren!!! It *WILL* happen - if we all close our eyes real tight, and listen to the sounds of CNBC we can "create thesis" together. You just have to believe ("I see dead consumers ....filling malls")
  • In Boise, families like the Capps and Muirs illustrate the paradox. This metropolitan area at the foot of the Rocky Mountains is home to a half-million people and is a base for electronics manufacturers such as computer-chip maker Micron Technology Inc. The area weathered downturns in the early 1990s and 2001, with unemployment rates remaining well below the national average. But now people here are socking away money they once would have spent, contributing in part to failing stores, shuttered restaurants and rising unemployment.
  • Four years ago, the Capps took out a $25,000 line of credit on their home and used it to buy a large sectional couch for their family room and a used Toyota 4Runner, to go along with the family's 1995 Toyota Corolla. Over the years, they also built up about $11,000 in credit-card debt and $40,000 in student loans. (oh we know how this ends...)
Ok enough! I heard from Mr. Larry Kudlow that the "great gas rebate" check will cause an onslaught of home & car buying - money from the heavens!
  • "We never go downtown anymore," says Mrs. Capp. "We're trying to consume less gas, less electricity, less food. It's across the board."
  • Even the family's cable-TV subscription didn't escape the scalpel. "It's been killing me because I don't get the Cartoon Network anymore," says Noah, a shaggy-haired teen. "I'm missing so many new shows."
Bugger! Doesn't fit the thesis! Ignore it!
  • The impact of such decisions is visible around Boise. At Home Federal Bancorp, a $725 million bank with 15 area branches, the number of new savings accounts was up by 26% in December from the previous year, said Steve Eyre, the bank's head of consumer banking. He said the bank is also seeing people save in their checking or money-market accounts. "It's pretty interesting to see those balances actually increase at a time when there's higher unemployment," he said.
So you are telling me even as the Federal Reserve takes rates down to 0%ish, destroying savers trying to do the right thing - in a mad attempt to get them to take on more debt - the "people" are thinking about their own interests. So you are saying... wait for it... that people won't take on more debt at any interest rate? Like say... Japan?

Nonsense. The punditry says the malls, car lots, and housing lots shall be awash in the masses any moment now... the power of the Federal Reserve is God-like - it can push people threatened by unemployment, housing implosion, stock market implosion to go forth and multiply (their purchases)! Thesis!
  • Meanwhile, many downtown restaurants have closed this year, including a number of locally owned eateries.
  • National retailers are pulling out as well. The Boise Towne Square, the region's primary shopping mall, is losing one of its anchor tenants, a Mervyn's department store. A furniture store across the street has also gone out of business. A nearby plaza has lost its two main tenants -- Linens 'n' Things and Circuit City -- as both liquidate nationwide.
So aside from the large chains we hear about - one off mom and pop stores that never get measured in the national news stories are failing? Leaving strip malls 30-70% empty. Hmm, I believe I read that prediction on a blog about 16 months ago... somewhere....(where could it be...)

Hmm, Boise must have just the worst unemployment rate in the nation - that's the only reason I can see for "facts" to not coincide with thesis shouted at me each day.
  • Unemployment in the Boise area is still below the national average of 6.7%. But the rate has risen swiftly, to 6% in November 2008 from just 2.7% a year earlier.
Ok not so much. One must wonder what it's like in the really economically challenged areas if the "better" off areas are acting like this. No, don't think like that - it might ruin your thesis.

The rest of the story is about various families unable to save for college for their kids, pulling money out of their ruined IRAs and 401ks, keeping their old cars and trying to make then last longer and other associated stuff we've been talking about for ages. It's crazy out there - people are acting rationally and hunkering down.

As I read this - seeing my predictions from 2007 play out one by one - I can only come to one conclusion:


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