The U.S. Savings Rate: Why the Perma-bears Are Wrong About Savings and Debt

by Alexander Green, Chairman, Investment U
Monday, April 23, 2007: Issue #665

People today are living longer, healthier, more comfortable lives than at any time in history. Americans enjoy an unprecedented level of affluence, too.

Yet some investment commentators – particularly the ones I call Perma-bears – insist that the world is going to hell in a hand basket.

It’s not just their opinions that are wrong, however. It’s their so-called facts

em>Perma-bears keep harping on the “fact” that Americans are swimming in debt and saving nothing. This is nonsense. If you believe them – and these beliefs keep you from owning stocks – it is likely to cost you a lot of money.Lets start with their rants about savings, which they glean from the national media. “Savings at 74-Year Low” screams one Associated Press headline. Another says “Official U.S. Savings Rate: Zero.”

Are these headlines wrong? No. But the Perma-bears have taken these stories and twisted them into something ominous.

The Truth About The U.S. Savings Rate

The truth is these figures deal only with personal savings. That is, savings that are made after-taxes. Most working Americans, however, sock away a portion of their paycheck each month in a 401(k). It comes out of their checks pre-tax, not after-tax. So it doesn’t count as savings.

If you and your spouse both work, you could be putting as much as $30,000 between you in a qualified retirement plan each year. (Furthermore, your employer may be doing some matching.) Yet according to official government statistics, you’ve “saved” nothing.

When you get your paycheck, you probably make a mortgage payment, too. Part of that money goes to pay down the principal, which builds equity. (You may even pay off a little extra from time to time.) But money you put into a mortgage is treated as consumption. So, once again, none of this is “savings” according to official statistics.

Of course, some Americans aren’t funding a 401(k) or doing any other saving either. Some don’t own homes and, of those who do, many aren’t paying down their mortgages. Instead they’re borrowing more against their homes, adding debt. That’s why Perma-bears often feel justified in saying that Americans are swimming in debt and the economy will eventually collapse like a house of cards.

But they’ve got their facts wrong here, too.

America Has Increased Its Net Wealth By $16 Trillion

There are plenty of Americans who spend too much and save too little. But they don’t represent the national trend. Net wealth in the U.S. – the total value of all assets, including stocks, bonds, bank accounts, houses and retirement funds, after subtracting debt – is approximately $54 trillion. That’s $16 trillion higher than it was four years ago. And it’s nearly 10 times what total net worth was in the U.S. in 1980. Total American wealth is clearly rising, not falling.

These are facts, plain and simple. Remember them the next time a bearish analyst tries to spook you into believing that wanton consumerism is driving the country down the road to ruin.

If there’s a real threat to our future prosperity, it’s coming from government, not consumers. Aside from spending like there’s no tomorrow, the federal government has made entitlement promises that cannot be kept once baby boomers reach full retirement. (More on “The Entitlement Meltdown” in an upcoming column.)

For this reason alone, you should save as much as you can (both pre-tax and post-tax) for as long as you can. It also helps to put that money to work as smartly as you can. And that means allocating at least some of your money to stocks.

Yes, there will be up markets and down markets. But don’t waste your time listening to the siren song of the Perma-bears. Their gloomy opinions change from year to year about as much as the constellation Orion.

Sure, everyone is entitled to his own opinion. But everyone isn’t entitled to his own set of facts.

Good Investing,

Alex

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