I was reading this article
and it theorized that sales in a consumer product (in this case, music cd's) has decreased in recent years because people are obtaining their music through other methods (itunes downloads and filesharing) and using the money they would have spent to pay off their credit cards for past music purchases. This seems like a really dumb hypothesis to me, but it got me thinking about a larger issue.
I started to get bothered by the fact that I really didn't know much about the savings rate and how it is figured, so I looked up some information. I've heard multiple times that the US personal savings rate is negative, but what does that really mean?
I did a very simple search and most of the articles came back with articles like this one
and this one
, which states that in 2005, the savings rate was negative in the US and this was the first time that's happened over the course of a whole year since the 30's, back when people were taking money out just to get through the depression. Seems like a completely different scenario to what is happening now, or at least how it's been presented in the current climate.
Usually, when people make a reference to the negative savings rate (if it is still negative since 2005), it's in the context that the 'average' US citizen is some kind of retarded, myopic moron that is incapable of understanding that if they spend more than they earn, things could be bad in the future. Now, I know that the average person on the street is, by use of the word 'average', not the sharpest knife in the drawer. Still, I don't believe that pessimistic characterization for a second. Now, I also don't believe that people save nearly as much as they should (on average), but I think they do try to save something, even if it is a small pittance in comparison to what they should save. Most of their error, I believe, is caused by inaccurate forecasting of their future needs and the sort of uninformed optimism that I encounter daily in my career. People are blissfully unaware of the future a lot of the time and there are agents out there (marketers, advertisers, etc.) who are trying as hard as they can too keep the wool as thick and far down over their eyes as possible.
So, why are the experts saying that there is a negative savings rate and what does this portend? This article
explained some of the specifics about what it means, as well as talking to some experts about their opinions. Got to love those 'experts', they seem to be full of confidence in their opinions. What was interesting is that I began to see how a negative savings rate could just mean that people are drawing down on their wealth, and not necessarily that they are spending 50K a year on speedboats and blow when they only make 35K annually. What if that coke binge and cigarette boat was financed through cashing out some equity on a condo in south beach that has been appreciating in value for years? It's possible.
I recall that back in 2005 or so, people were big time into those 4% mortgages and the housing bubble was really gaining momentum. Isn't it possible that Joe America got duped by some new confidence scam? What if the real estage agent, mortgage finance guy, and others thought they were doing Joe a big favor by helping him buy that new corvette and matching luxury wrist watch, but they were really just exacerbating the problem of growing debt and financial insolvency? I'm no expert, but I know people who refinanced in that time frame, lived it up and spent a lot of money for a short period of time on some pretty silly things, and now they find themselves in a very tight spot since their assets haven't been appreciating as promised. Time for the belt-tightening.
I've seen quite a few people, even on this site, who seem to be in this situation. A few years ago, you may have been riding the crest of the money wave and now you find yourself struggling to stay afloat, lest the undertow sweep your feet out from under you.
Looking back on my own personal savings rate over the past few years, it's just been going up and up. I started out with something like 25% in 2006 and 45% in 2007. How about the rest of you?