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Funhouse Mirrors #1: Personal Savings Rate

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  • Funhouse Mirrors #1: Personal Savings Rate



    Funhouse Mirrors #1: Personal Savings Rate

    So how is the US economy doing, anyway? Hard to say. Using government stats to size up the economy is like trying to gauge the results of your diet by standing on a rigged scale in front of a funhouse mirror.

    This is the first of a random series of brief treatments we call "Funhouse Mirrors." Today: the Personal Savings Rate.

    Definition
    The BEA's National Income and Product Accounts (NIPA) definition of personal saving is the difference between personal disposable income and personal spending. Personal income includes wages, asset income (dividends and interest), rental income and supplements to wages, including pension and 401(k) contributions, including pension contributions made by employers to traditional defined benefit plans as though they were individual income--but not the subsequent gains (or losses) they might incur. NIPA excludes capital gains--both from investments (including investments within retirement plans).
    Simple, right? Nope. Here come the warped mirrors.
    Software: A New Calculus for the New Economy
    Business Week 1999

    The Commerce Dept. also rejiggered the composition of the national savings accounts, raising personal savings while lowering government savings by an equal amount. That's because of a new way of accounting for government pension plans, contributions to which are now considered a form of personal rather than governmental savings.

    The reshuffling means that the personal savings rate is now calculated as 3.7% for 1998 instead of a previously reported 0.5%. The new methodology will undoubtedly turn the current personal savings rate from negative to positive. But since the government's savings fell by a corresponding amount, the reshuffling had no impact on the overall national savings rate. And the downward trend in personal savings is still in place. By the new measure, the personal savings rate declined from 10.9% in 1982 to 3.7% last year, instead of from 9% to 0.5% as had been previously reported.

    Even after this new "formulation" the personal savings rate still declined into negative territory, frustrating the government's effort to make an ugly statistic pretty.



    Where are we now?
    "Personal saving as a percentage of disposable personal income was a -0.5% in February, the same as in January. Negative personal saving reflects personal outlays that exceed disposable personal income."
    -U.S. Commerce Department, Bureau of Economic Analysis (BEA), June 2006
    Makes you wonder what the rate would have been by the old rules. Let's see. If 3.7% in 1999 by the new rules was 0.5% in 1999 by the old rules, what's negative -0.5% in 2007 by the old rules? Negative 3.3%? Yikes.

    If personal saving is so negative, how are wage earners making ends meet? Are they making up the difference using income from capital gains, which are not counted as personal saving?

    For the top 5% of households, capital gains are indeed a significant portion of income.



    These tend to be households of persons of retirement age who are no longer employed and are living off their retirement savings income. However, this income is not counted in the BEA's savings numbers because the net of personal disposable income from capital gains and personal spending are the result of earlier savings that were already counted as saving back when they were working.

    What does that leave as a source of funds to make up the delta between disposable income and spending?

    Debt, of course.



    Which begs the question: Why is it getting harder for wage earners to save? The answer: Inflation. Not wage inflation, but goods and services price inflation.



    We go into the topic of inflation in detail in Funhouse Mirrors #2. Briefly, here's the deal.

    We typically see consumer price inflation reported via the Consumer Price Index or CPI. Like the personal savings rate, the CPI is a complicated and ever-changing formulation itself that increasingly stretches credulity. You may shake your head when you read that CPI inflation has only increased a few percentage points this year even as your food, gasoline, insurance, and tuition bills go through the roof.

    In addition to the exclusion of "volatile" components, such as energy, from the "core" reported CPI number, the main reason the CPI doesn't relate to your experience is that the CPI is a composite of traded goods and services that are mostly imported and non-traded goods and services that are largely domestically produced or provided with no practical price competition. In other words, you have a dozen different stores to go to and vendors to chose from when you buy a cell phone made in Japan. But you aren't going to fly to Korea for a cheaper MRI, or fly home to Mexico every night because housing is cheaper there–travel costs outweigh the goods or service price advantage.

    Since the early 1980s, prices of traded goods such as clothing and small appliances and electronics from Asia have been falling while the prices of non-traded goods and services, such as education and health care, have been rising. Inflation in the prices of the latter are a function of domestic credit production, that is, the Fed and the credit markets. Inflation in the prices of the former are offset by low wage rates and currency management by goods exporting countries, especially China. Guess which items you tend to spend the most on? That's right. You're never going to spend as much in total on imported electronics and clothes, which prices are falling, as you spend in total on tuition, insurance, housing and other items that pick up all the monetary inflation which manifests as rising prices. Combine that with the exclusion of gasoline and other items with "volatile" prices from the CPI are and you can understand why a low CPI reads like nonsense.

    But don't expect the situation to improve much. As Asia and other exporting areas of the world grow more wealthy, wage rates are rising, and as Asian currencies strengthen against the dollar, import prices will rise. That means the long era of "cheap" imports is coming to a close, and even the "core" CPI will soon begin to rise along with long term interest rates.

    What about wage inflation? If credit is driving up the prices of goods and services, aren't wage earners' wages rising just as fast?

    No. BEA data clearly show the growth rate of real (inflation adjusted) disposable income steadily declining, from an annual growth rate of 4.28% in 1960 to 2.27% last year. The annual growth in disposable income varies significantly year to year but as the chart trend line shows, the long term trend has been downward for decades.


    Conclusion

    In the government funhouse mirrors, the US economy appears to be healthy. Taking away the personal savings rate mirrors reveals a nation of individuals who are not earning enough to offset the rising cost of living, even with cheap imports. Wages may be rising, but not as fast as the prices of goods and services, and you are spending more on items that are rising in price than you are on items that have been falling in price. Wage earners are making up the difference by increasing their borrowing.

    This describes what you actually experience when you look around you and talk to your friends and neighbors, and what you experience yourself, doesn't it?

    The message is this: you are not crazy. The numbers are crazy, the way they are collected and analyzed by the government. You're just fine.

    Next we'll dig into the inflation numbers. When we're done, you won't feel like you've lost your mind when you read the Fed say "inflation is moderating" just after you've ordered Chinese take-out off the forth menu with new prices you've seen this year. The problem isn't you. The problem is your government.

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    Last edited by FRED; 11-01-07, 03:37 PM.

  • #2
    Re: Funhouse Mirrors #1: Personal Savings Rate

    Great article!

    Here are some other major aspects of inflation metric lies, just to round out the list:

    - Diverting attention to the core-CPI instead of the full CPI.
    - Diverting attention to the (core) PCE instead of the CPI (the PCE is used to adjust the GDP, and is preferred by the Fed, because it is the lowest of all the "inflation metrics").
    - "Hedonics adjustment" ; e.g. the government scales down the price of computers by half because they are now twice as fast (even if it is for the same sticker price). These adjustments are completely arbitrary and a playground for manipulation.
    - Geometric averaging instead of (simple) arithmetic. This has the effect of muting price increases and amplifying price decreases. The government switched to this method in the mid-90s claiming to be representing a "substitution effect" (e.g., buying hamburger instead of steak when the price goes up). However, by the BLS's own admission, when they did a study to see if this effect really occurs, the results were inconclusive. They made the change anyway.
    - Replacement of home prices with "owner equivalent rent" in 1983 (home prices were going up, after all).
    - No representation of debt servicing costs.

    Here is my classic chart strongly suggesting M1 would make a far better proxy for an inflation metric of domestic goods and services.

    Comment


    • #3
      Re: Funhouse Mirrors #1: Personal Savings Rate

      Along the lines of the fantasies and fudging of data like the PCE & CPI, the GDP deflator came in about 2.4% lower than the average for the last few years - if it would even have been average, GDP would have been around 1.5% instead of 3.9%.



      Make sure you have your paddles...

      http://www.NowAndTheFuture.com

      Comment


      • #4
        Re: Funhouse Mirrors #1: Personal Savings Rate

        Originally posted by bart View Post
        Along the lines of the fantasies and fudging of data like the PCE & CPI, the GDP deflator came in about 2.4% lower than the average for the last few years - if it would even have been average, GDP would have been around 1.5% instead of 3.9%.
        and the reason the gdp deflator was so low was because of the increase in the price of imported oil.:rolleyes::eek:

        Comment


        • #5
          Re: Funhouse Mirrors #1: Personal Savings Rate

          Originally posted by EJ View Post
          Next we'll dig into the inflation numbers. When we're done, you won't feel like you've lost your mind when you read the Fed say "inflation is moderating" just after you've ordered Chinese take-out off the fourth menu with new prices you've seen this year.
          Too bad an undervalued Yuan doesn't help us out on Chinese take-out.

          Comment


          • #6
            Re: Funhouse Mirrors #1: Personal Savings Rate

            Originally posted by akrowne View Post
            Great article!

            Here are some other major aspects of inflation metric lies, just to round out the list:

            - Diverting attention to the core-CPI instead of the full CPI.
            - Diverting attention to the (core) PCE instead of the CPI (the PCE is used to adjust the GDP, and is preferred by the Fed, because it is the lowest of all the "inflation metrics").
            - "Hedonics adjustment" ; e.g. the government scales down the price of computers by half because they are now twice as fast (even if it is for the same sticker price). These adjustments are completely arbitrary and a playground for manipulation.
            - Geometric averaging instead of (simple) arithmetic. This has the effect of muting price increases and amplifying price decreases. The government switched to this method in the mid-90s claiming to be representing a "substitution effect" (e.g., buying hamburger instead of steak when the price goes up). However, by the BLS's own admission, when they did a study to see if this effect really occurs, the results were inconclusive. They made the change anyway.
            - Replacement of home prices with "owner equivalent rent" in 1983 (home prices were going up, after all).
            - No representation of debt servicing costs.

            Here is my classic chart strongly suggesting M1 would make a far better proxy for an inflation metric of domestic goods and services.
            akrowne,

            Great points about inflation metric lies. My question, after looking at your chart is: Doesn't the 66% population rise since 1960 account for a portion of M1's rise? Would M1/capita be a better metric?

            Jimmy

            Comment


            • #7
              Re: Funhouse Mirrors #1: Personal Savings Rate

              How about an interview with David Walker, Comptroller General of the United States? Or does itulip already have one? He seems to be some one on the itulip side of the situations/discussions, or is that not so?

              Comment


              • #8
                Re: Funhouse Mirrors #1: Personal Savings Rate

                You're being ironic here, right?

                Originally posted by EJ View Post
                The message is this: you are not crazy. The numbers are crazy, the way they are collected and analyzed by the government. You're just fine.
                ...After seeing numerical proof of what I've known for decades, that real-life inflation is going up while wages stagnate, I don't feel "just fine" at all !

                Comment


                • #9
                  Re: Funhouse Mirrors #1: Personal Savings Rate

                  If iTulip could get David Walker on an interview here that would be a major, major coup. Very big deal - but of course there are some real limits to his freedom as a Federal employee. To be linked to a "frank interview" on website that already levels such harsh charges against the Federal Goverment.

                  Unfortunately, it ain't gonna happen Otr. Great idea though.

                  Comment

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