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In the 1992 election campaign, H. Ross Perot predicted a "giant sucking sound" of U.S. jobs heading for Mexico if the North American Free Trade Agreement passed. Perot seems to have been wrong on that - wherever U.S. jobs have gone, it's not Mexico.
Nevertheless, if you listen carefully there's still a "giant sucking sound" - but this time it's the sound of U.S. capital headed overseas.
Personal income for February was flat according to the Bureau of Economic Analysis, but personal consumption expenditure was up 0.3% -- in other words Americans were spending more money without having more income. The personal savings rate, expressed as a percentage of personal disposable income (after taxes and social security payments) dropped in the month to 3.1% from 3.4% in January.
That drop in the savings rate is worrying. The February rate is far below the 4.7% average savings rate in 2009, heading down towards the all-time low annual savings rate of 1.4% in 2005.
It had been hoped that the savings rate in the recession would rise back towards the 1965-95 average rate of about 8%. That would have provided domestic capital to finance domestic industry and at least part of the budget deficit, making the United States somewhat less dependent on foreign investors for its needs.
The United States had a very low savings rate through the 2002-07 economic cycle. It manifested itself in a number of ways: The balance of payments deficit soared to above $800 billion in 2006, and consumer borrowing broke record after record. However, if damage was done to the U.S. economy, it was beneath the surface.
This time around, we may not be so lucky. The difference is that the federal budget deficit is running at over 10% of gross domestic product (GDP). That means that foreign money not only has to help U.S. corporations finance capital expansion, since savings in the U.S. economy are lacking, but it also has to pour 10% of U.S. GDP into the maw of the federal Treasury.
This will almost certainly have two effects.
First, the U.S. payments deficit will expand far beyond $800 billion per annum, stopping only when foreigners refuse to buy more U.S. assets. Second, U.S. businesses will find it very difficult to get money, and so any plans they have for capital expansion in the domestic market will be stymied.
In the long term, a payments deficit of this size combined with an ultra-low savings rate has a pernicious effect. It starves the U.S. economy of capital.
In the past, U.S. living standards have been in the best in the world for three reasons:
- The education system was excellent - but many other systems have caught up with it.
- It was relatively un-bureaucratic, un-corrupt and low-tax - all of which appear to be changing.
- And most important, it had the most capital to support its pool of labor. That capital superiority has already been sharply diminished, owing to the low, post-1995 savings rates in the United States and the high ones in Asia; it may now be about to disappear altogether.
The solution to these problems is obvious, but frustratingly difficult to get adopted in the face of entrenched opposition. It is for U.S. interest rates to rise sharply, so that savers are assured a substantial real return on the amounts they save.
Since 2000, any saving has been penalized by an interest rate below the rate of inflation (well below, after tax has been paid) and by a stock market that has gone nowhere. Meanwhile, even excessive borrowers were hugely subsidized by the Fed at the expense of savers.
Only when interest rates are well above the level of inflation, and taxes are adjusted so that savers are not unfairly penalized (such as by the double taxation of dividends, at the corporate and individual level) will savings recover enough that the economy's domestic capital needs are funded from domestic sources.
As for the huge budget deficit, that has to go - or at least it must quickly be brought down to a level at which it can be financed domestically, without U.S. debt spiraling out of control.
Higher interest rates and a balanced budget. That's what's needed - but politicians and the Fed will fight it every inch of the way.
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During the stock-market rebound that started in the middle portion of March 2009, Hutchinson's calls on gold, commodities and high-yielding dividend stocks made winners of investors who took his advice.
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News and Related Story Links:
- Bureau of Economic Analysis:
PERSONAL INCOME AND OUTLAYS: FEBRUARY 2010
- Money Morning:
Question of the Week: Is it Too Late to Stage an Intervention for Our Government's Spending Addiction?
- Money Morning:
How to Protect Yourself - And Even Profit - if Foreign Creditors "Strike" U.S. Treasuries
- Money Morning:
Will America Choke on its Own Debt?
- Money Morning:
The Truth About Inflation...
Great observations, but painfully obvious. Make some useful suggestions to cure the problems, then you have a story.
Here's my suggestion in the form of a letter to the editor I wrote to a local paper. Some of you surely remember newspapers.
Over the last century, American manufacturing has made progress toward fair labor and environmental quality. Americans have accepted paying higher prices for the moral benefit of fair working conditions and environmental quality. But over the last thirty years, this moral society has degraded into a selfish consumption frenzy that has re-accepted exploitation of workers and the environment all over the world. If we really believe our rules of civilized labor and sustainable ecology have value to all people, we should lead the world toward implementing those values.
One approach is to apply standards to imported products similar to those we apply to domestic products. If all imports had to be certified that their labor and environmental content adhered to some minimum set of rules, then American consumption would regain its lost moral dimension. This would also benefit American workers as manufacturing would move back here where the fair and sustainable infrastructure already exists.
This is not a individual problem. As a collective every body has to work towards a common goal towards the up lifting of the country which will never happen in US and they are bound to face so much problem.Americans has to understand that the 'WORLD IS NOT DEVELOPED BY ONE PERSON'.One cannot expect in any way Americans can work in a collective group in any of the field.That is why there is a problem and this problem will persist until all the American changes their attitude in United States.
U.S. corporations have so much cash on hand they are increasing the dividend payments.
The points mentioned are correct. One of the first things taught years ago in graduate business school was this often heard phrase: "The bond market never lies"! What this means is that the
30 year bond called "The long bond', always shows you instantly what inflation really is. You do not need the government to tell you. The reason is that real money has no allegience to ideology or anything else. Real money always goes where it can earn at least 2.25% above inflation tax free.
By real money I mean anyone or any iinstitution with large amounts of money such as Warrenn Buffett, Bill Gates, the state of Texas, GE, Goldman Sachs, The Shieks of Saudi Arabia or the Oligarchs of Russia etc., it makes no difference. Thus the country offering what is considered to be the safest and highest rate on 30 year bonds is usually where the money will flow.
To find the current inflation rate in any country just subtract 2.25 % from the offered yield and you will have the inflation rate. So If our 30 year treasuries were yielding 4.5 % less 2.25%
equals a 2% current inflation rate. Artificially low yields here would force real money to head to Germany, France, Indonesia, India or Brazil etc. stable countries with higher yields. For those without large amounts of cash bank rates on CD's would serve a similar purpose. And while very low rates help keep the country's deficit down it also undermines the peoples ability to save.
I agree with all that you say, even though it would be painful to implement, at least in the short run. Unfortunately, I see 0% probably that any of it will occur. To use an analogy, the drug addict only reforms, if ever, after he has hit absolute rock bottom. As long as "Uncle Sugar" is around to bail him out, he will remain a drug addict for life.
Great article. Unfortunately we have a system that punishes savers by taxing them to death (literally – I should say AT death) and there is little incentive to save when you wind up knowing you are going to pay for a TOTALLY OUT OF CONTROL FEDERAL GOVERNMENT AND THEIR SPENDING through taxes or just spend it yourselves. You are not being rewarded for saving. Close to half the people in this country pay no income tax! They have no skin in the game. I know they pay payroll taxes, property taxes, etc. but if the income tax isn't a level playing field, then the 50% that do NOT pay have no incentive to change it. Their reaction is just let the other 50% pay it. Well, you know the 50% that do see this as being unfair. This is true whether that 50% that don't pay are too rich and avoid it through loopholes or are deemed too poor to owe. Everyone should pay some of a tax no matter what it is. If we want more people to save, we should make tax laws that encourage it. At the rate this government has been spending over the last 2 administrations, that is not going to happen. They are going to bleed us to death to pay for all this spending they are doing. We need to rethink WHAT THE ROLE of the federal government is. If it is defense, interstate commerce and transportation and say basically that, then there is no need for an education dept., Fannie Mae and Freddie Mac, etc. That should be left to the states and local governments. Not everything needs to be under federal control. If we weren't sending tax money for all these programs done at the federal level, then more might stay at the source (state and locally) where the actual work was getting done – instead of having our congressmen and president taking bribes in the form of lobbying money and campaign donations (which is nothing more than criminal bribery and has been going on for decades) to get it back to their states and local governments. It makes no sense! So much gets lost in waste and fraud along the way. We need the Supreme Court to declare our lobbying system and campaign donation system criminal and get rid of it (it will be the only way to do it) and get back to some basics with more done at the state and local level. Think how much we could save if we reduced the size of the federal government.
It is not only miniscule interest rates, inflation and taxes which penalize investors. Allowing banks to maintain service charge levels while paying such low interest is not helpful.
What about Congress. I think they could try and act.
Thanks
Dave
Though it may be true that some businesses may not get the capital they need I see a basic flaw in those observations. Healthy companies EARN the money they need for slow and steady expansion. They do not need outside capital. In fact using outside capital makes them vulnerable.
If the US government wants to increase savings by private people all they need to do is make the banks pay 2% more than the discount rate with a cap at 15%. On top of this the government should not take money from tax income under some 1000 or 2000 dollars. That might be incentive enough to save.
Companies can take advantage of the carry trades other than the little people who are gouged locally. Here the government should also cap interest. A credit card issuer should never charge more than 15%. That leaves some more money in the pockets of the consumers to either consume and patronize business or may be even save some.
The market is a pit bull run by some pit bull masters but is not the instrument for balancing out forces of supply and demand. Just remember the see saw. On one side you sit with your 100k and on the other Mr. Buffet or Mr. Soros or whoever. Guess where you are going? As the government is in the hands of those heavy weights the consumers are just chicken little. Unless they bring their capital into other countries…
Here in Australia we did not go into recession during the GFC. In fact interest rates have been going up each month with the prime rate 50% above inflation (i.e. inflation around 3% and interest rate at 4.25% and rising again next month by .25% most likely). The financial and economic stuctural changes were made in Australia during the 80's and 90's has seen continued economic and social benefits for the last 30 years, With the resource boom continuing for most likely the next four decades, the economy also continues to grow for the benefit of our total population. Consumer spending is up, new cars sales continue to increase and new housing starts are outstripped by demand. All this and we still have great beaches and blue skies.
Correction of above:
The government should not collect taxes on interest income of 1000 or 2000 dollars.
Nice comment Richard. I like the way you included " for the benefit of our total population" it makes me proud to be Australian. Every citizen should benefit from their nations prosperity not just the owners of capital. Despite our problems, we really are the "lucky country".
As for the US savings problem. Many countries have lower real interest rates, higher taxes and have higher savings rates than the US. For example, Germany and France and all have savings rates over 10% and top tax rates over 40% and lower real interest rates. A lot of the issue is cultural – the US has been hijacked by consumerism, basically the need to have "stuff" whether that be a bigger house, new car, clothes, electronics or other material possessions. The situation is exacerbated by buying all this "stuff" on credit you can't afford, both personally and as a nation.
Solving the problem is complex, add US politics into the equation and it becomes a nightmare. I suggest reading about the "paradox of thrift" and the "Washington Consensus" to help you understand just how complex your predicament is.
One component of the solution is to over haul the US taxation system. Firstly, it is ridiculously complex and secondly it penalizes the poor and favours the wealthy and big business (thanks to Reagan and Bush).
We've been moving to more govt for decades.You should be happy with the results.
As the U.S. becomes poorer more people vote for more govt which causes further decline.That's been the story for decades.As long as the majority of Americans remain short term greedy and long term stupid it won't change.Not much hope.Stay out of Dollar investments and in real assets and investments in growing Asia.