Tuesday, June 20, 2006

NYT Magazine Money Issue

Yes, it's taken me more than a week to digest the June 11th issue of the New York Times Magazine, whose theme was money, with a particular focus on the hairy red monster that is DEBT. This has just added to the "doom and gloom" atmosphere I posted about recently. The best article in the issue, I thought, was one called "Reasons to Worry," which began by comparing the US economy to a dinosaur, and wondering whether it can evolve rather than share the dinosaurs' fate.
The depressing case is built:
We have a huge national debt.
Consumer indebtedness is growing in relation to the GDP
The national savings rate is approaching zero.
People think they will retire later than they actually do, so they don't have enough money to retire on.
The US trade deficit is huge.

"The average American has an income of about $40,000 a year and ... a personal savings rate of zero. The average Chinese earns about $1,500 a year but has personal savings of 23 percent of his income-- and is lending a large chunk of these savings, via the People's Bank of China, to the average American."

The dollar has been declining in value-- this may be a good thing, as our debts are are denominated in dollars so their value is thereby lessened. Also, it would make our exported goods cheaper and help reduce the trade deficit. But, this would cause the dollar price of imported goods to increase, thereby stimulating inflation. Inflation might still be a good thing in a way: it means that "the real value of your debt ends up being reduced (in terms of the purchasing power of the amount that you owe)" but only if your debt is not adjustable rate or linked to an index, which our national debt is. The low interest rates of the last few years helped lower the cost of servicing the national debt. But since many bonds issued by the Treasury are short-term, they will now have to be refinanced at higher rates: "It turns out that George Bush has the biggest ARM in the world."

Does this all this cause and effect stuff start to sound a little complicated? And scary? Back to the dinosaur analogy: America's economy has a "small, wealthy head; [a] big, fat middle; and [a] long low-income tail" and "the global economic climate seems to be changing.... It's too soon to speak of extinction, of course. But one obvious inference to be drawn from the British experience of an indebted empire and a sliding currency, as well as from the history of the diplodocus, is that eternal life is not on offer."

Whew. Now on top of all this, I recently finished reading Jared Diamond's Collapse and saw An Inconvenient Truth, more fodder for negativity, if you choose to see them that way. Now before people start thinking I've gone off the deep end, let me just say that of course I don't really think the world is going to end tomorrow-- otherwise I TOTALLY would have gone for the interest-only 1-year ARM for my condo!

If you looked back at news stories over the past century, I'm sure the apocalyptic predictions would recur time and time again. Yes, we're still all here today, but that doesn't mean there's never any cause for worry. Will we someday dig ourselves into a hole we can't get out of?


jtc said...

Global warming is a sham.

Anonymous said...

A little known fact about the national savings rate is that it actually exludes money contributed to 401(k) plans. Now, that is kind of ridiculous if you ask me! If someone is paying off their mortgage, and kicking $15,000/year into their plan, they still count as saving 0% of their income, based on the way the fed does its calculations. Also, investment earnings in regular accounts are not counted as savings either.

Madame X said...

That is a very interesting fact about the national savings rate, Anonymous. It would be good to see the numbers both ways, since I'm pretty sure a lot of people aren't necessarily maxing out their 401ks. Also, since 401ks are a relatively recent innovation and many people used to get pensions from their employers instead, it sort of makes sense not to count them if you want an apples to apples comparison.

mapgirl said...

I think the other thing to consider is that China might not have the same social services that we do in the US, hence the need to save a lot more money than we do. The WSJ had an article recently about this sort of thing. There is a pension program in China of some kind that's going to go bankrupt soon. I'm curious to see what that will mean to the global economy. It goes hand in hand with the CNN/Money article I saw today about US Baby Boomers cashing out of the market as they retire.

I'm curious if any of your readers can comment on what kind of social security style programs are in China.

mOOm said...

There are two different things - national savings rate and personal savings rate. The personal savings rate is currently negative - it doesn't include capital gains - I would have thought that 401(k) contributions are included in the personal income and savings as they are part of total employee compensation. Interest and dividends on regular taxable accounts definitely are. The national savings rate adds to the personal savings rate of individuals saving by business and (dis)saving by government. Business saving is profits they don't distribute as dividends. That's why capital gains aren't included in personal income and savings.

The national savings rate has fallen but is still positive.

Something else to remember that commentators never seem to bring up is that the personal savings rate is an average of everyone - both workers and retirees. If it is zero or negative - workers might still be saving for retirement but their saving is being offset by retirees dis-saving. As the population ages you'd expect the savings rate to decline.

It's true that social security is a disincentive for saving. Increasing inheritances are too.

In China, government enterprises used to take care of their retirees but at a very subsistence level of course through the danwei system. But as far as I know the state itself does not provide any welfare. So as private enterprise expands more and more people need to save. The very high Chinese national savings rate is not just due to personal saving. The government and business are saving at very high rates too. It's not like individuals in China typically save 40% plus of their income. More like a mean of 15-20%.