As usual, the truth about the financial condition of Americans is hidden in plain sight. All that's missing is some widespread coverage of the news and some serious reflection about what it means. The Wall Street Journal reported the story in Number of the Week: Americans Dipping Into Savings (January 22, 2010).
Over the two years ending September 2010, Americans withdrew a net $311 billion — or about 1.4% of their disposable income — from their savings and investment accounts, according to the Federal Reserve . That’s a sharp divergence from the previous 57 years, during which they never made a net quarterly withdrawal. Rather, they added an average of 12% of disposable income to their holdings of financial assets — including bank accounts, money-market funds, stocks, bonds and other investments — each year.
To some extent, people are acting exactly as policy makers want, at least in the short term. By holding interest rates near zero, the Fed is creating an incentive to spend rather than save — or to “save” in a different way by paying down expensive debt. With three-month certificates of deposit offering annualized interest of less than 0.3%, using available cash to pay off a credit card that charges 30% or a mortgage that costs 5% makes a lot of sense.
Over the two years ending September 2010, U.S. consumers — largely through defaults, but also through pay-downs — shaved nearly a trillion dollars off their mortgage and other debts, a shift that could make them less sensitive to credit freezes like the one we just suffered.
As the Journal notes, Ben Bernanke wants you to plow through your savings to sustain the miraculous recovery his near-zero interest rate policy has achieved. But there's a slight problem with this happy scenario.
In the longer term, though, Americans need to do more old-fashioned saving as well. One recent poll [xls spreadsheet] found that only 35% of Americans had enough emergency savings to cover three months of living expenses.
The less money they have for a rainy day, the more vulnerable they will be to job losses and other income shocks. As we have learned in the most recent crisis, credit is far from a perfect substitute for a healthy bank account.
The poll is a little out of date. FINRA did an online survey of 28,146 respondents across all 50 states (plus D.C.) between June and October, 2009. Since then, we've experienced the best statistical recovery money can buy. If the survey were done today, perhaps 36%, or even 37%, of Americans have enough "emergency or rainy day funds to cover their expenses for 3 months in case of sickness, job loss, economic downturn, or other emergencies"
The real problem with Americans not having any rainy day funds is that the forecast calls for rain—and plenty of it. At least that's true for those living in the lesser of our two economies, which is roughly 85% of everybody. For most the American Dream has become a nightmare. Vulnerability to shocks is now a way of life. The dream now is to get through another week. Unfortunately, the 454,000 Americans who filed unemployment claims didn't make it through last week.
The Journal says "in the longer-term, Americans need to do more old-fashioned saving." Yes, that's what they need to do some day when good-paying jobs are plentiful, health care is affordable and sound money falls like rain from the sky. My question is: when exactly will that day come?
And the likely answer for the large majority of Americans is: Never.