[R-G] [BillTottenWeblog] Debt Deflation Arrives

[Bill Totten]

What the Jump in the US Savings Rate Really Means

by Michael Hudson

CounterPunch (June 30 2009)


Happy-face media reporting of economic news is providing the usual upbeat
spin on Friday's debt-deflation statistics. The Commerce Department's
National Income and Product Accounts (NIPA) for May show that US "savings"
are now absorbing 6.9 percent of income.

I put the word "savings" in quotation marks because this 6.9 per cent is
not what most people think of as savings. It is not money in the bank to
draw out in  rainy-day emergencies like losing one's job, as thousands are
every day. The statistic means that 6.9 per cent of national income is
being earmarked to pay down debt - the highest savings rate in fifteen
years, up from actually negative rates (living on borrowed credit) just a
few years ago. The only way in which these savings are "money in the bank"
is that they are being paid by consumers to their banks and credit card
companies.

Income paid to reduce debt is not available for spending on goods and
services. It therefore shrinks the economy, aggravating the depression. So
why is the jump in "saving" good news?

It certainly is a good idea for consumers to get out of debt. But the
media are treating this diversion of income as if it were a sign of
confidence that the recession may be ending and that Obama's "stimulus"
plan is working. The Wall Street Journal has reported that Social Security
recipients of one-time government payments "seem unwilling to spend right
away", while The New York Times wrote that "many people were putting that
money away instead of spending it". It is as if people can afford to save
more.

The reality is that most consumers have little real choice but to pay.
Unable to borrow more as banks cut back credit lines, their "choice" is
either to pay their mortgage and credit card bill each month, or lose
their homes and see their credit ratings slashed, pushing up penalty
interest rates near twenty per cent. To avoid this fate, families are
shifting to cheaper and less nutritious food, eating out less or at fast
food restaurants, and cutting back on vacation spending. So it seems
contradictory to applaud these "savings" (that is, debt-repayment)
statistics as an indication that the economy may emerge from depression in
the next few months. While unemployment approaches the ten per cent rate
and new layoffs are being announced every week, isn't the Obama
administration taking a big risk in telling voters that its stimulus plan
is working? What will people think this winter when markets continue to
shrink? How thick is  Obama's Teflon?

In the wreckage of the Greenspan bubble

As recently as two years ago consumers were buying so many goods on credit
that the domestic savings rate was zero. Financing the US government's
budget deficit with foreign central bank recycling of the dollar's
balance-of-payments deficit actually produced a negative two per cent
savings rate. During these bubble years savings by the wealthiest ten per
cent of the population found their counterpart in the debt that the bottom
ninety per cent were running up. In effect, the wealthy were lending their
surplus revenue to an increasingly indebted economy at large.

Today, homeowners no longer can re-finance their mortgages and compensate
for their wage squeeze by borrowing against rising prices for their homes.
Payback time has arrived - paying back bank loans, whose volume has
swollen to include accrued interest charges and penalties. New bank
lending has hit a wall as banks are limiting their activity to raking in
amortization and interest on existing mortgages, credit cards and personal
loans.

Many families are able to remain financially afloat by running down their
personal savings and cutting back their spending to try and avoid
bankruptcy. This diversion of income to pay creditors explains why retail
sales figures, auto sales and other commercial statistics are plunging
vertically downward in almost a straight line, while unemployment rates
soar toward the ten per cent level. The ability of most people to spend at
past rates has hit a wall. The same income cannot be used for two
purposes. It cannot be used to pay down debt and also for spending on
goods and services. Something must give. So more stores and shopping malls
are becoming vacant each month. And unlike homeowners, absentee property
investors have little compunction about walking away from negative equity
situations - owing creditors more than the property is worth.

Over two-thirds of the US population are homeowners, and real estate
economists estimate that about a quarter of US homes are now in a state of
negative equity as market prices drop below the mortgages attached to
them. This is the condition in which Citigroup and AIG found themselves
last year, along with many other Wall Street institutions. But whereas the
government absorbed their losses "to get the economy moving again" (or at
least Congress's major campaign contributors), personal debtors are in no
such favored position. Their designated role is to help make the banks
whole by paying off the debts they have been running up in an attempt to
maintain living standards that their take-home pay no longer supports.

Banks for their part are slashing credit-card debt limits and jacking up
interest and penalty charges. (I see little chance that Congress will
approve the Consumer Financial Products Agency that Obama promoted as a
flashy balloon for his recent bank giveaway program. The agency is to be
dreamed about, not enacted.) The problem is that default rates are rising
rapidly. This has prompted many banks to strike deals with their most
overstretched customers to settle outstanding balances for as little as
half the face amount (much of which is accrued interest and penalties, to
be sure). Banks are now competing not to gain customers but to shed them.
The plan is to offer steep enough payment discounts to prompt bad risks to
settle by sticking rival banks with ultimate default when they finally
give up their struggle to maintain solvency.

The trillions of dollars that the Bush and Obama administration have given
away to Wall Street would have been enough to buy a great bulk of the
mortgages now in default - mortgages beyond the ability of many debtors to
pay in the first place. The government could have enacted a Clean Slate
for these debtors, financed by re-introducing progressive taxation,
restoring the full capital gains tax to the same rate as that levied on
earned income (wages and profits), and closing the tax loopholes that
effectively free finance, insurance and real estate (FIRE) sector from
income taxation. Instead, the government has made Wall Street virtually
tax exempt, and swapped Treasury bonds for trillions of dollars of junk
mortgages and bad debts. The "real" economy's growth prospects are being
sacrificed in an attempt to carry its financial overhead.

Banks and credit-card companies are girding for economic shrinkage. It was
in anticipation of this state of affairs, after all, that they pushed so
hard from 1998 onward to make what finally became the 2005 bankruptcy laws
so pro-creditor, so cruel to debtors by making personal bankruptcy an
economic and legal hell.

So, to avoid this fate, people are putting more money away, but not into
savings accounts. They are indeed putting it into banks, but in the form
of paying down debt. To accountants looking at balance sheets, savings
represent the increase in net worth. In times past this was mainly the
result of a buildup of liquid funds. But today's money being saved is not
available for spending. It merely reduces the debt burden being carried by
individuals. Unlike Citibank, AIG and other Wall Street institutions, they
are not having their debts conveniently wiped off the books. The
government is not nice enough to buy back their investments that had lost
up to half their value in the past year. Such bailouts are for creditors
and money managers, not their debtors.

The story that the media should be telling is how today's post-bubble
economy has turned the concept of saving on its head.

This is not what people expected a half-century ago. Economists wrote
about how technology would raise productivity levels, people would be
living in near utopian conditions by the year 2000. The textbooks need to
be rewritten.


Keynesian economics turned inside-out

Most individuals and companies emerged from World War Two in 1945 nearly
debt-free, and with progressive income taxes. Economists anticipated -
indeed, even feared - that rising incomes would lead to higher saving
rates. The most influential view was that of John Maynard Keynes.
Addressing the problems of the Great Depression in 1936, his General
Theory of Employment, Interest, and Money warned that people would save
relatively more as their incomes rose. Spending on consumer goods would
tail off, slowing the growth of markets, and hence new investment and
employment.