September 4, 2008

U.S. Personal Savings Rate To See Big Gains

by Ron Robins, MBA

From my blog: Enlightened Economics

There is good news coming. Americans are about to save more, much more. A
new consciousness is dawning. It is one that brings enhanced balance to
Americans material and inner personal lives as they re-evaluate their futures
due to changed circumstances. Boomers approaching retirement are seeing
their homes decline in value, their stock market investments in difficulty, and
concerned about government support—are realizing the importance of savings
as never before.
Recently, U.S. tax-payers received up to $600 in cash from their government. It
seems that Americans are choosing to save it. In May 2008 the savings rate as
a percentage of personal disposable income shot-up to 4.9% and in June to
2.5%. This occurred after the rate was near zero for about three years and the
lowest since 1933. These higher savings rates are just the beginning of a trend
that I believe will crest with savings rates in excess of 10% in the next few
years.

Higher savings rates will eventually create a new economic equilibrium and
allow for vigorous economic expansion. However, until this new economic
equilibrium emerges, the increased savings rates have some downsides. It
begins with a significant reduction in consumer expenditure. The U.S. is the
world’s leader among developed countries in having the highest consumption
relative to its gross domestic product (GDP). Stephen Roach of Morgan
Stanley shows that U.S. consumption is about 71% of GDP, compared to 56-
57% in most other developed countries. The U.S. average for the years 1975–
2000 was 67% of GDP, and for 1950-1975 around 64%. Now the U.S. is likely
to head back to the latter figure.

Why Americans will save more

Another consequence of lower consumption will be further downward pressure
on Americans most important asset – their homes. Until recently, Americans
saw their homes as the safe place to invest in and build equity for retirement.
But they now understand this strategy may not work well in the future.
Purchasing a home for investment purposes will be de-emphasized. Home prices
are likely to fall even further, scaring particularly those boomers to save in other
ways.

In addition, declining consumption could mean even lower stock market returns
than even the abysmal ones seen in recent years. Adrian Ash in his article, The
Decade of No Returns, says, “… the total return [capital gains and dividends] on
the S&P500 [the pre-eminent U.S. large companies stock index] was actually
negative for the decade ending on 30th June 2008.” The numbers were adjusted
for inflation as well. By far the largest proportion of Americans’ stock
investments are held in companies that make-up the S&P 500 Index.

Incidentally, if you account for the declining value of the dollar internationally,
then performance of the S&P 500 delivered a negative real return of about -20
to -40% over the past 10 years! And Americans investing in S&P 500 companies
did also participate significantly in the growth of foreign market as well. Such
revenues grew rapidly to around 40% of total S&P 500 sales during this period.

Therefore Americans planning to retire in the next few years cannot rely on the
stock market to replicate its gains seen between 1980 and 2000, to fund their
retirement. They simply have to save more and place some of those savings
away from the stock market. (Note: I do not anticipate Americans abandoning
stocks. And there will be some market sectors that will do very well even if the
broad market struggles.)

Boomers also have to question the ability of the U.S. government to fund their
medical needs and pensions in retirement, as the U.S. government is in one
heck of a hole – a hole of around $70 TRILLION! The enormity of this funding
gap cannot be easily grasped. But let us try. In an article, U.S. ‘fiscal gap’
paving the road to meltdown, by Derek DeCloet in the Canadian Globe & Mail he
states, “To earn $70-trillion in profit, you’d need 1,723 companies the size of
ExxonMobil; $70-trillion would be equal to the annual sales at 1.35 million Wal-
Mart stores. [Now that’s]… not the size of the U.S. government’s debt, though.
It’s the shortfall between its projected future revenues and what it plans to
spend (in today’s dollars).”

It is evident from the U.S. government’s financial position that its promised
benefits to its citizens could be cut significantly – while substantially raising
taxes as well. In such an environment boomers have no other option but to
urgently save a heck of lot more now.

A new consciousness arising bringing balance to spending and saving

Americans, whether they be boomers or from generations X, Y and Z, are at the
cusp of a new consciousness. They will bring a new balance to their material life
and inner desires. The rapidly changing financial picture together with a
fundamental shift in their consciousness concerning what is important in life, will
place a renewed emphasis on savings. In years to come, this will be seen as a
great turning point for the American economy, a turn towards a more balanced
Enlightened Economics.

——————————————————————–
© Ron Robins, 2008. Permissions: Provided full credit, which includes title, my name, and link
to this post is given, anyone may print or re-produce this article in part, or in full, to any
relevant web page.