It is hard to avoid an ominous sense of déjà vu when we read the Reuters analysis Recovery at risk as Americans raid savings.
More than four years after the United States fell into recession, many Americans have resorted to raiding their savings to get them through the stop-start economic recovery.
In an ominous sign for America's economic growth prospects, workers are paring back contributions to college funds and growing numbers are borrowing from their retirement accounts.
Some policymakers worry that a recent spike in credit card usage could mean that people, many of whom are struggling on incomes that have lagged inflation, are taking out new debt just to meet the costs of day-to-day living...
After a few years of relative frugality, the amount of money that Americans are saving has fallen back to its lowest level since December 2007 when the recession began. The personal saving rate dipped in November to 3.5 percent, down from 5.1 percent a year earlier, according to the U.S. Commerce Department.
Personal savings as a percentage of disposable income from Calculated Risk. This chart was last updated in November for data through October. Look at the plunge as 2011 wound down.
And what about the surge in consumer credit?
U.S. consumer borrowing rose by the most in a decade during November, surging 10% with Americans pulling out their credit cards as the holiday shopping season got rolling.
The level of consumer credit outstanding increased by $20.37 billion to $2.478 trillion, the Federal Reserve said Monday. Economists surveyed by Dow Jones Newswires had forecast an $8.0 billion increase.
In percentage terms, the increase was the biggest since October 2001 and a big driver of the gain was revolving credit, which includes credit-card debt. It increased by $5.60 billion to $798.27 billion.
Nonrevolving credit also surged, rising $14.78 billion to $1.679 trillion. The increase was fueled by federal government, a category that includes student loans and has been increasing a lot over the past year–a sign high joblessness in the U.S. has led many people to go back to school.
Incomes for the vast majority of Americans are not keeping up with inflation. The "official" data shows that energy costs rose 6.6% in 2011, while food and beverage prices rose 4.5%. This latter number is not credible to anyone who did their own grocery shopping last year.
Americans are whipping out the plastic to pay for daily living expenses, or dipping into savings accounts. The overall savings rate is a misleading indicator of the actual level of distress felt by most Americans. Consider this quote from Joseph Stiglitz's The Book Of Jobs, which was published in the January, 2012 issue of Vanity Fair.
Even when we fully repair the banking system, we’ll still be in deep trouble—because we were already in deep trouble. That seeming golden age of 2007 was far from a paradise.
Yes, America had many things about which it could be proud. Companies in the information-technology field were at the leading edge of a revolution. But incomes for most working Americans still hadn’t returned to their levels prior to the previous recession. The American standard of living was sustained only by rising debt—debt so large that the U.S. savings rate had dropped to near zero.
And “zero” doesn’t really tell the story. Because the rich have always been able to save a significant percentage of their income, putting them in the positive column, an average rate of close to zero means that everyone else must be in negative numbers.
Here’s the reality: in the years leading up to the recession, according to research done by my Columbia University colleague Bruce Greenwald, the bottom 80 percent of the American population had been spending around 110 percent of its income.
What made this level of indebtedness possible was the housing bubble, which Alan Greenspan and then Ben Bernanke, chairmen of the Federal Reserve Board, helped to engineer through low interest rates and nonregulation—not even using the regulatory tools they had. As we now know, this enabled banks to lend and households to borrow on the basis of assets whose value was determined in part by mass delusion.
This time around the mass delusion brought about by the Housing Bubble is gone. There is only more and more hardship. And yet the pattern is the same—surging consumer credit demand and a sharp decline in personal savings. Let's quote Reuters again.
"When the stock market and the housing market were booming, we saw that a lot of people would take on more debt and save less. They felt the saving was being done for them," said Mark Vitner, managing director and senior economist at Wells Fargo Securities in Charlotte, North Carolina.
"Today, the saving rate is falling out of necessity. Food and energy prices have risen and folks don't have as much money to spend on the things that they would like."
Just as Americans used to borrow against the value of their homes before the property crash, now many are taking out loans from their 401(k) retirement savings plans.
Almost a third of plan participants currently have a loan outstanding, according to an upcoming survey of 150,000 holders of 401(k)s by consulting firm Aon Hewitt.
"People are at a loss, and they are struggling," said Pam Hess, director of retirement research at consulting firm Aon Hewitt.
Yes, Americans are at a loss and they are struggling. This should be Front Page News, but nowhere does it appear there. We are flooded with news about the NFL playoffs or the Republican primaries or Obama's lame tourism initiative instead.
Just because the period 2008-2012 is not like exactly like the Great Depression of the 1930s doesn't mean we aren't suffering through a depression (little "d"). Imagine if credit cards had been freely available in the 1930s. Imagine if Americans had had 401k savings plans. Those desperate people would be doing what today's desperate people are doing—raiding savings and piling up credit card debt to pay their bills. This thought experiment may seem a little farfetched, but it's not. The differences are not really as great as they first appear.
Piling up debt and drawing down savings are not substitutes for income. This will not end well.
Call it what it is: "eating the seed corn." People are acting like there is no tomorrow. The sad part is, in terms of our current economic model they're right even if they don't know it.
Posted by: Bill Hicks | 01/23/2012 at 12:21 PM