Apples and Oranges

Recently both our own pgl and David Altig take on the debate about savings. David provides us with a very useful graph (showing some slight improvement in savings in the most recent quarters) but then throws out the idea that household net wealth is still growing. PGL replies that net wealth isn’t growing all that fast and is a notoriously noisy series anyway. I want to make clear a few fundamental issues that I am sure David and PGL know about but which may remain a bit unclear after reading the most recent posts

1. Savings is a flow and net wealth is a stock. They are NOT different ways to measure the same thing and comparing them directly is comparing apples to oranges. Savings is one of the ways in which net wealth is either increased (if savings is positive) or decreased (if savings is negative) in any particular period. But net wealth also depends on capital gains which for households depend among other things on both the stock market and the value of their houses.

2. To count capital gains in your house as an increase in your savings is a mistake we saw many people make during the tech stock boom a few years ago. Your balance sheet may look great for a while but you don’t really have the money until you actually sell the asset. It would be just as foolish today for people to say “Hey aren’t I the smart one!! I have so much wealth in this house I am not going to sell that I should buy a new car, a plasma TV, and a European vacation!!!”

3. PGL is 100% correct that asset values tend to bounce around a lot more than many other values. I think his point about the growth in household wealth over the past few years is well taken but you could easily get different results if you choose your beginning and ending points carefully. That is precisely what is worrying – If the housing boom ends soon as is predicted in some quarters the slight growth in household net wealth pgl notes could very easily turn into a negative number.

4. The main point in my original post (which remains true even with pgl’s correction and David’s comments) is shown very clearly in David’s graph. Those of an incurably optimistic bent – certainly a good quality to have – can hang their hat on the slight upturn in savings rates over the past few quarters. But I defy anyone to draw a regression line through those series for the past two decades and come up with anything that has a positive slope or to be happy about where those rates are at the present time compared with other industrial countries or our own history. And THAT was the original thought that inspired me to write about this.

Savings rates are usually a slow moving variable. They don’t typically change drastically from quarter to quarter or year to year unless there is something forcing them to which is why it took 20 years for ours to decline from somewhere in the vicinity of 10% to somewhere in the vicinity of 0% or a little above. What worries me is the possibility that something may indeed force an adjustment back the other way. Remember that our desire to dissave must be mirrored by somebody else’s desire to save (i.e. lend us money). It is still not at all inevitable that we will have an unpleasant adjustment forced on us but we would be foolish to act as if the current situation is either inherently stable or capable of lasting indefinitely. If such an adjustment IS forced on us, capital gains in our houses wont help us much. We are unlikely to all be able to sell them very fast even if they maintain their increases in value of the past few years. And as for the likelihood that those values will keep rising all I can say is that I wouldnt want to bet the rent on it.