U.S. Household Savings: Cowry shell monetarians
By J. Christoph Amberger
Taipan Group's Dynamic Market Alert
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U.S. Household Savings: Cowry shell monetarians
by J. Christoph Amberger
Shell money consists of seashells, or even fragments of them that nimble fingers ground into beads or tiny discs. The tribes of Alaska and California reportedly highly esteemed a particular species of tusk shell found along the northwestern Pacific Coast. It was valued by length measured by finger joints, with its highest denomination consisting of 25 shells strung together, about 6 feet long, and worth a fistful of dollars among brothers.
Internationally, shell money made of cowry shell was coveted. In Bengal, 3,840 cowry shells made up a rupee.
From the perspective of cowry shell monetarians, modern Americans are utterly irresponsible: Measured by cowry reserves, few U.S. households would be considered prudent, prosperous, let alone well-off, by the standards of a 19th-century Maldives coconut bazaar.
Applying the standards 19th-century Western economists have developed to ascertain the wealth of nations, Americans don’t seem any better off. It's not the lack of cowry shells that sticks in their craw but the personal savings rate in the U.S.: The raised index fingers of paternalistic preachers of parsimony jab at its decline in the late 1990s, its tumble to a 70-year low in 2001, and its collapse into negative numbers in 2005.
Americans "live beyond their means"..."don't provide for their future"... "live paycheck to paycheck."
It's something to feel good about, in a way. Europe and Asia can rationalize their still not inconsiderable lagging behind American standards of living and prosperity by pointing out that the average prudent European has a few hundred bucks squirreled away in a passport savings account. Maybe even a string of cowry shells, picked up on the three-week beach vacation on the Maldives.
But last week, Barron's published an article titled "The Great American Savings Myth," whichcalls into question the personal savings mantra my colleagues of the bearish persuasion have been ho-humming about like Tibetan monks chanting over yak butter candles.
Barron's writes:"Household net worth -- assets minus debt -- has never been higher, having grown rapidly even as the personal savings rate nose-dived. How can we be getting richer without saving? It's more likely that the existing definition of personal savings will no longer do. In fact, a broader measure, far from running negative, reached a 50-year peak in 2004 and was still near it by 2006."
The article is reviving a case I made in my book Hot Trading Secrets two years ago; that the household savings rate by now is an insufficient and incomplete indicator of financial health.
The core problem is in the definition: The Bureau of Economic Analysis defines “personal saving” as whatever is left after spending on consumption is subtracted from disposable personal income.
Barron's argues: “The key reason is that the mix of savings has shifted toward flows the official data don't capture. ... People often associate 'savings with the quaint picture of a hard-working employee dutifully depositing part of a paycheck in a passbook bank account. Such venues are hardly extinct. Of the $55.6 trillion in household net worth by year-end 2006, $6.7 trillion was in checking accounts, time deposits and money-market funds. But in a modern economy, most saving is money put at risk, often with the hope of large returns and the chance of substantial losses. So even if the dramatic rise in net worth is based on asset bubbles waiting to burst -- though the historical evidence belies this dour view -- it would not alter the fact that saving occurred. It would mean only that the saving was misallocated.”
At the end of 2006, American household net worth clocked in at a record $55.6 trillion. Household net worth was 584.1% of disposable personal income (DPI), the second highest multiple on record. Real net worth per household is now at a record high of $486,000 -- 31.7% higher than at the end of 1996.
Of course, large parts of this net worth contained in assets whose valuations are at risk and may fluctuate (like real estate prices and stock portfolio valuations). But home equity, for example, represents just about one-fifth of total household net worth. A catastrophic crash of 30% -- almost three times as severe as the 1974 free-fall would result in a total net worth decline of just 7%: “Even after such a big hit, household net worth would still be 22.9% higher than in 1996.”
In fact, over the past 50 years, Barron's notes something Keynesians have known for decades: “Saving often looks strong just when gains in net worth are weak -- and weak just when gains in net worth are strong.”
And they continue: “Far from running negative in 2006, personal savings, under our broader definition, came to $2.66 trillion -- a record high in nominal dollars.(...) Real saving per household has been on a plateau over the past several years, peaking at $23,800 in 2004 and still running at $23,250 in 2006.”
We may still be short on the wealth quotient inherent in cowry shell money hoards, but I'd like to re-emphasize a recurrent theme here in the Dynamic Market Alert: It usually pays to question the numbers on which the lowing herd bases their analysis. An insufficient set of data is a poor substitute to make financial decisions on.
The congenital bears have paid dearly for looking at numbers to support their paternalistic gut feelings by missing out on boom after boom after boom. Let's not make that mistake here at TFN!
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