Ken Fisher
06/01/2007
Americans are the world’s biggest savers, and our negative personal saving rate proves it.
I hope that this rate will drop even more, but that’s an assertion few would agree with. Pundits pontificate that we’re profligate spenders, living beyond our means and drowning in debt, (greedily and stupidly) spending all we make, and then some. Our "diss-saving" is unsustainable, so the thinking goes. Consumer spending will cease, whacking the economy and the stock market.
This is nearly universally believed. But I would argue that universal beliefs are frequently baseless myths, and you should ask yourself, "What do I believe that’s actually false?" So, is it true our sinking saving rate will wreak havoc? Go one step further and inquire: "Could the negative rate actually be good?"
The chart above shows America’s plunging personal saving rate in red. Note that it has been sinking for 20 years; we’ve been diss-saving for a generation. Yet, household net worth, shown in blue, has grown the entire time, even though saving turned negative. Some may cry foul, claiming residential real estate is largely driving our net worth. Wrong. The green line strips that out and the trajectory remains. Our saving rate wanes, yet our net worth waxes.
How Can That Be?
The problem isn’t profligacy. The problem is the rate methodology. Here’s why. First, capital gains aren’t included in the chart. According to our official saving rate, if you invest $10,000 in stocks, later sell for $20,000, and take your gains and walk away, you may think you saved, but you’d be wrong. Even odder, based on the rate, Bill Gates became the world’s wealthiest guy by never saving. He merely built Microsoft (once worth nothing and now with a market cap over $270 billion), but never saved. The saving happened inside the company of Microsoft, which the "personal" saving rate data doesn’t take into account. Gates, the individual, didn’t save. Capital gains is one important way Americans save. Your house, stocks, business and sundry assets appreciate, but that’s not official saving.
What Else Is Excluded?
If your employer contributes to a pension or other retirement plan for you, it is not included. Distributions from those plans don’t count as saving going in, but they reduce your saving coming out. Try that one for perverse. Nothing you can do about it; you are doomed to diss-save.
"Owner’s imputed rent," a fictitious charge of what they think you should pay yourself to rent the home you own and occupy, also reduces saving. Obviously, homeowners don’t pay themselves rent, so there’s no real transaction. Nevertheless, they charge it against saving. Silly as it sounds, it’s nontrivial and puts a $1 trillion-per-year dent in personal saving. Do away with this one arbitrary item and our negative saving shoots to more than 7 percent of GDP. We’re suddenly super savers—and the only thing that is different is the accounting.
Our official saving rate doesn’t reflect reality. See it this way: The rate headed south as Americans shifted savings from the CDs, money markets and bank accounts of past decades into appreciating assets including businesses, stocks, real estate, pensions and more—growing their net worth. It’s not about spending profligately, but about saving in a new and better way and boosting productivity.
Hence, the truth: A negative saving rate can be good. Here’s hoping for more negativity. Few investors can fathom this, relying instead on myth. In fact, saying a negative saving rate is good angers some folks. Let them stew. You prefer to be right, and the truth here is that our official saving rate is backward and broken. Americans are the world’s best and most consistent savers, but you’d never know it from looking at our official saving rate.
Ken Fisher is author of The New York Times business bestseller
The Only Three Questions That Count.