Wednesday, March 18, 2015

Why Spend When You Can Save?

According to the most recent measure of Personal Saving Rate and Real Disposable Personal Income by the U.S. Bureau of Economic Analysis, both the Personal Saving Rate and Real Disposable Income have been trending higher in recent months. This by itself is wonderful news and should be reason for optimism. But alas, in the world of macroeconomics things are [almost] never that simple. Increases in the Saving Rate should be followed by increases in investment and consumption, though the same can be said for increases in debt. The investment side of things is underway insofar as financial markets are liquid and risk is cheap, thanks to the co-ordinated efforts of Central banks around the world. The tangible side of investment still remains elusive, as fiscal leadership no-doubt has to play a pivotal role in making those dreams a reality.

The measure preferred by the Fed for tracking inflation, The Personal Consumption Expenditures Price Index, which is also compiled by the U.S. Bureau of Economic Analysis, is already below the Federal Open Market Committee’s (FOMC) explicit objective.  The Index has been extending its trend lower in recent months. The headline measure [which includes oil] is far lower of course than the core measure which is meant to be more stable over time. The core measure is also falling, which indicates that some of the downward pressure on consumer prices is already baked into our ‘economic cake’. The irony of the situation is that what is playing out among households across the United States was first demonstrated by the commercial banks with new Fed money; they saved or deleveraged, and would only spend on investments that were high priority.

After all, the American consumer has not received a real raise in quite some time, so it would be somewhat difficult to save and consume at the same time especially since job confidence took a huge hit with the 2008-2009 recession. It is also generally agreed that American debt (both households and government) was reaching unsustainable levels leading up the Great Recession. The Fed helped the banks, the Federal Government didn’t do much, and now households are finishing the job of the public sector. Americans will continue to save until the collective urge for gratification becomes overwhelming, and then the savings accounts, retirement accounts, home equity, credits cards, and student loan money will be unleashed unto the global economy again. And of course, the banks will be there with a new and improved list of financial instruments that are guaranteed to make the world a better place.

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