Squanderville
America is a nation living beyond its means. Investment guru Warren Buffet, one of the world’s richest men, has taken to calling America “Squanderville” for the way Americans have transformed wealth into liability.
Household debt now exceeds disposable income by a record amount. From the early 1980s to the early 1990s, the personal savings rate plummeted from 10.4 percent to 6.5 percent. It fell further, to 2.2 percent, by 2000 and remained there until last year, when it dropped to 1.8 percent. As of July 2005, it is negative. According to the Bureau of Economic Analysis, the July personal savings rate nose-dived to minus 0.64 percent.
Surprisingly, this negative rate occurred against a backdrop of record-high seasonally adjusted earnings of $10.3 trillion. Out of that amount, $1.2 trillion was paid in personal taxes, leaving $9 trillion in disposable income. But of that, Americans spent $9.14 trillion—$58.8 billion more than they earned (Washington Times, September 4). In other words, for every $100 earned, Americans spent $100.65.
Only one other time since the Great Depression have Americans had such a dismal savings rate. That was during the month following the September 11 terrorist attacks, when the savings rate fell to minus 0.2 percent. It was then attributed to consumers holding back from spending during the uncertainty immediately following the attacks and consequently increasing spending in October.
How is a negative savings rate possible? Debt. Consumers finance expenditures by borrowing on credit cards or home equity, selling investments (stocks, bonds and other assets), or by using savings from previous months.
According to the Daily Reckoning, Americans’ negative savings rate has been supported by extra debt. Since 1990, median household income has risen only 11 percent after adjusting for inflation, but household spending has jumped almost three times that—by 30 percent. Between 1992 and 2004, household debt doubled to more than $10 trillion. Instead of producing more to offset the increased spending, Americans are borrowing more.
What does this mean for America?
As a nation, we have been over-consuming. As a result, we have not planned for retirement, especially this last generation. The majority of Americans have less than $25,000 accumulated for retirement, while many experts recommend figures around $500,000.
People have also been skimping on emergency savings. A Gallup poll recently found that only 41 percent of people have an emergency fund; 31 percent of those said that it would not last as long as three months.
Americans’ indebtedness does not bode well for future economic growth, since savings fuels investment and a nation’s subsequent growth. Borrowing to finance investment can work, as long as the profits from that investment pay the interest on the borrowed money. Unfortunately, investment has not been the purpose of recent debt in America. Americans are going deeper into debt for more toys.
All this debt is leaving the nation’s economy overexposed to disasters. Peter Schiff, an economist at Euro Pacific Capital, asks whether Hurricane Katrina will be the pin that pops America’s “savings-starved economy” (www.europac.net, September 1). Since the United States lacks the domestic savings required to rebuild New Orleans, it once again has to rely on the kindness of foreigners buying our debt to fund the reconstruction.
It appears that indebted American consumers won’t regret all that debt until foreigners stop being so eager to finance their bad spending habits. When that happens, rising interest rates will help pop the housing bubble; refinancing will stop; construction will grind to a halt; unemployment will rise; bankruptcies will escalate.
How long could you afford to be out of a job and still make your mortgage and credit card payments? As Paul Kasriel, senior vice president and director of economic research at the Northern Trust in Chicago, said, “America is going to become reacquainted with a lost value, something called thrift or saving” (Beloit Daily News, Nov. 12, 2004).
