Monday, June 29, 2009

R.I.P. U.S. Consumer

Credit for the chart below goes to Wall Street Bear.

And where'd that money go (I used rolling 12-month as the monthly data is too choppy)?

Before you celebrate the fact that the savings will be consumption at some point in the future, think again. Per Market Ticker:

"Saving", by the way, includes debt paydowns; the government in its "infinite wisdom" computes the "savings rate" as "income less spending", which is not actually correct; money that goes from income to paying down debt isn't "saved". This increase shows that consumers continue to reduce borrowing activity (out of both choice and necessity) and are desperately trying to tread water in their sea of debt (never mind the occasional shark that comes by for a snack!)
Owe Jesse makes the case that reduced debt burden is just as good as savings and I will agree to that (and I'll admit I overlooked that). My thinking was related to the amount "saved" due to the making of interest payments that don't reduce an individuals debt burden. In that case, I don't see the net benefit going forward.

Source: BEA


  1. Denninger is his usual stupid self here. The NIPA data doesn't address capital and debt, only investment and consumption.

  2. The portion I wanted to make clear was that "savings" isn't necessarily savings.

  3. I beg to differ: What's your reasoning to say that a reduction in debt is not saving? What's the difference between a reduction of debt and an increase of money surplus? Both will increase the net value and net interest payments.

  4. ... make that decrease net interest payments or increase net interest recieved.

  5. Yes, savings as an accounting identity is different from the common usage of savings as a pile of money in a bank account. But on an economics blog it think "savings" should mean the accounting identity, and "reducing debt" or "acquiring assets" should be applied to actions on the capital side of the ledger. There are good reasons why the NIPA data doesn't address capital accounts and Denninger should know that. If he wants to yammer on about net worth he should refer to the Flow of Funds report. But I guess he couldn't pass up an opportunity to disparage the government.

  6. Owe Jessen- i'll agree with your point if it reduces debt (overlooked and my mistake), but what about the case where the amount "saved" only goes to make interest payments. in this case nothing is saved and debt isn't decreased.

  7. The interest payment is part of the total debt, therefore repayment is savings.

    What kills the consumer is that credit is shrinking faster than savings are growing. The money being repaid is not being re-lent.

  8. apparently i am unable to clearly communicate my thoughts (it is a clear case of the mondays).

    what consumption and savings miss are the level of debt that needs to be serviced. in other words, if there is a lot of debt, it doesn't capture how much debt will grow by if it is not paid down, which DOES effect future consumption.

    for example.

    scenario 1) i have no debt or savings. then i earn $100 and save 10%. my savings of $10 can be spent in the future.

    scenario 2) i have $100 in debt with a 10% interest rate. then i earn $100, spend $90, and service my debt with the balance. i have no savings that can be spent in the future AND i still have $100 in debt.

    i understand i already spent that $100 at some previous point (hence why i have the debt), BUT that will not help in the future unless it was spent on an asset that still has a productive use.