When the numbers for robust consumer spending were
released in late January, the Associated Press reported
that Americans “dipped further into their savings,
pushing the savings rate for all of 2005 into negative
territory at minus 0.5 percent.” In other words, you
and I spent our savings, or went into debt to finance
Christmas. The mainstream media can’t report any
economic news without putting a negative spin on it. So
the AP writer added, that the fall in the savings rate
“was the lowest annual savings rate since a decline of
1.5 percent in 1933, a year in which the country was
struggling to cope with the Great Depression.”
Bush did it. We’re heading for another
depression. Americans didn’t earn enough money in 2005
to be able to afford Christmas presents for their
families. Oh, what a terrible economy. The sky is
falling.
And on and on it goes. There’s a Republican
in the White House, so total economic collapse must be
just around the corner. It doesn’t matter that inflation
has been low, unemployment is low, stock indices are
making multi-year highs and in some cases, all-time
highs, more people own their own homes now than at any
other time in history and the values of those homes have
grown into sizable nest eggs. It’s all a mirage—a house
of cards—just waiting to topple at the slightest ripple
of uncertainty.
Here is something to consider regarding the
latest statistics on consumers spending their ‘savings.’
The way the Commerce Department reports
savings does not include capital appreciation, it only
reports savings as new money deposited into a savings
account. So let’s say you have a brokerage account at
Merrill Lynch or some online account with Dreyfus or
Fidelity. Furthermore, let’s assume you are an astute
investor. Some of your money has been invested in a
well-diversified portfolio of stocks or mutual funds and
the balance in Bonds or CDs. The value of your account
should have been steadily increasing over the last few
years, whether you added new money to it or not. But
this increase in your net worth does not count as
“savings.”
And if you decided to pack it in here in New
Jersey, and you sold your home for ten times what you
paid for it, moved south and retired on the cash that
was leftover, none of that counts as ‘savings’ either.
Charles Lieberman, Managing Member and Chief
Investment Officer at Advisors Capital Management LLC in
Paramus explains just how bizarre the Commerce
Department statistics can be made to look with the
following example.
“Two people save $100,000 in their
retirement accounts, say 401(k) accounts, but in very
different ways many years ago. One bought bonds (any
kind, since the choice doesn't matter) and the other put
all his money into one stock, say Microsoft or Berkshire
Hathaway. Today, the bond investor has $300,000 and the
stock investor has $10 million. The rise in account
value for the bond investor was counted as part of
personal income and saving each and every year. For the
stock investor, the gain did not count at any time over
the entire period. But now they start taking their money
out and living off it because they're both retired. In
both cases, the removal of the funds is treated as a
reduction in savings assets. So, if one guy spends it
all, it counts as negative savings for the economy of
$300,000. The other guy counts as negative savings to
the tune of the entire $10 million. This problem affects
all capital appreciation, not just stocks. So gains in
real estate create precisely the same problem.”
Americans may not have ‘saved’ anything in
2005 but many of them are wealthier than they have ever
been. The only ones struggling to cope with a ‘Great
Depression’ are the critics of the Bush economy hoping,
in vain, for its collapse.
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