Friday, May 28, 2010

Not Sustainable - Part II

My Not Sustainable post from last month involved the same inputs; compensation (not to be confused with total income) and consumption. Noted back then was that real compensation has declined ~$400 billion, while consumption has jumped ~$150 billion since March 2007.

This month's 'Not Sustainable' goes back further... the recent period of over-consumption started as much as 30 years ago.

People now consume ~135% of compensation earned before taxes and ~155% of compensation earned after taxes paid. For some people, this may make sense (depends where you are in your life cycle / if you have other sources of wealth). But the ~135% and ~155% is the AVERAGE for every American at every age group and as we learned in 2007-2008, wealth can be fleeting.

Source: BEA


  1. how can this be when we have a positive savings rate?

  2. "Compensation (not to be confused with total income)"

    People have other sources of income and wealth. For example, returns on financial assets.

    The concern is that this form of income may not be sustainable (as we saw in 2001-2 / 2008-9). It is also a reason why the Fed and Treasury have attempted to reflate asset values and financial assets or else a massive drop in consumption would likely follow.

    The question I have is whether all of this was real wealth creation or just a situation where people were spending what may turn out to be "paper wealth" vs. actual wealth.

    My guess it was a combination of the two and going forward these ratios will be forced to decline.

  3. so you're saying if you add in other sources of income such as financial assets this will show something more like 100% of income (including financial assets) instead of 130% in the chart? Just doesn't seem possible. Something is off.

  4. Eric obviously you're responsible so spending like this doesn't make sense to you.

    Seriously though, let's say there are three people each making 100k dollars. If one person goes out and buys a 300k dollar house, the average is 100% of income for our three people assuming the other two buy absolutely nothing and nobody pays taxes. If everyone decides to eat, pay rent, pay taxes etc. one can quickly see how you have an average above 100%. All you need are a few people per year to take on a large amount of debt (student loans, students usually have no income; home loans, which are expected to be greater than ones annual income etc.).

  5. There's no reason it can't be sustainable - or at least go on for a very long time - if there is a healthy credit system and people's incomes are growing.

  6. Purple- you imply 30 years of this has not already been a very long time.

    You do make a good point. It can go on, until it can't. That by definition is unsustainable. Just ask Greece. They were "able" to overconsume for ~15 years as their income (i.e. economy) grew and grew, until it didn't. The problem with debt is that it remains, even if the asset or income to support that debt has left.

    Example... I can easily afford payments on a 0% $10mm loan to pay for a $10mm house (payments are zero). Is that sustainable? It is as long as home prices go up. But what happens when that loan is called and the house is now worth $9mm?

  7. The chart is showing 50 years of us consuming more than we're producing. There just isn't any way that is true.

    For part of that time our total credit market debt to gdp was declining. How can you be consuming more than you're producing when total debt (for all entities in the economy) to GDP is declining?

    Something is off. Maybe your consumption numbers includes consumption by business and/or governments but your income is just individuals.

    Maybe this will all make sense if you also include a chart based on "total income" instead of compensation.

  8. Eric- this chart only shows compensation and consumption. It does not show any single detail related to production.

    All data is linked to at the bottom of the post. Go take a look...