Relevant and even prescient commentary on news, politics and the economy.

The saving rate paradox

by Rebecca Wilder

Edward Harrison at Credit Writedowns is theorizing why the saving rate is falling when it should be rising, as households scram to deleverage their balance sheets. My reaction to this is twofold: first this is a meaningless exercise; but second, and worse yet, there’s likely something very “unhealthy” going on here.

Meaningless: The BEA conducts a comprehensive revision of the NIPA tables every five years. The saving rate is usually revised upward, and by a fair amount, as was the case for most of the 2000s.

So in “roughly” 5 years from 2009 (it’s not uniformly 5 years between each revision), you will see a higher saving rate than you do today. As I said in July, the

“BEA has “found” that households have been in fact saving roughly 1% more of their disposable income per quarter since 1995, 0.9% per quarter in 2008.”

They will “find” it again.

Unhealthy: But even if they don’t “find” much more than an average +1% a year, there’s probably something a bit more sinister and non-economic (i.e., in addition to the wealth, income, or substitution effects – see Edward Harrison’s post on this point) going on here: non-market activity is rising. I haven’t seen a study to this point – if you have, please send me the link; I am very interested – but I wouldn’t be surprised if non-market income has creptup lately, i.e., through the informal labor force.

With an employment-to-population ratio a shocking 58.5% in February (it was 63.4% as recently as March 2007), there’s got to be a growing supply of labor that is “working under the table” just to get by. This non-market income would flow through the spending accounts but not the income accounts. Therefore, you have official consumption going up with official income (doesn’t include non-market income) stalling, which reduces the saving rate.

Now go back and read Marshall Auerback’s push for government as ELR (appropriate credit is given in this report)!

Rebecca Wildercrossposted with News N Economics

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Raw materials and global competition

by Stormy
(lifted from e-mail to me and MG)

Whether there is or is not a near peak in either of these two metals (copper and gold), we
should expect to see prices inexorably climb. The reason? The enormous
appetite of China for raw materials. However we look at it, China’s
ponderous entry onto the world stage has been the most significant economic
event in the last 50 years. (Rdan hereit looks like copper prices are driven mostly by demand to date according to the charts, not lack of supply reserves)

Now the question is: How will this affect the U.S. and Europe? Certainly,
there will be a race to secure raw materials, especially those whose supply
is clearly and perhaps measurably finite. Furthermore, this race comes at a
time when the U.S. and Europe are not exactly flush with cash.
Economically, I would say that this one of the biggest stories out there.
Problems such as Greece and U.S. debt must be placed in this context.

China’s massive workforce has been deflationary in terms of the cost of
labor. On the other hand, the actual cost of resources will climb, both
because of dwindling supplies as well as the increasing cost to bring them
into the production stream.

Stormy asks.

Rdan here: I found the following in the comments from Jon and Gail the actuary especially relevant for us novices:

Jon says:

“One gets a much better picture of the situation by actually reading the reports put out by the USGS. From the 2010 Minerals Yearbook section on copper:
World Resources:

Recent assessments of copper resources indicated 550 million tons of copper remaining in identified and undiscovered resources in the United States8 and 1.3 billion tons of copper in discovered, mined, and undiscovered resources in the Andes Mountains of South America.9 A preliminary assessment indicates that global land-based resources exceed 3 billion tons. Deep-sea nodules were estimated to contain 700 million tons of copper.

Aluminum substitutes for copper in power cables, electrical equipment, automobile radiators, and cooling and refrigeration tube; titanium and steel are used in heat exchangers; optical fiber substitutes for copper in telecommunications applications; and plastics substitute for copper in water pipe, drain pipe, and plumbing fixtures.

Peak production and peak demand will be determined ultimately by peak price.”

Gail says:

” It seems to me we have a lot of different things going on with copper:

1. Extraction is very energy dependent, so cost of extraction tends to vary with the price of oil.

2. Ores are getting to be of lower and lower quality.

3. Techniques for extraction are getting better over time, using less energy (one of the true forms of energy efficiency.)

4. Other metals can be substituted for copper, if the price gets high enough.

5. Economies around the world have been growing, generally pushing up the demand for metals.

6. Financial issues affect demand. The easier it is to get credit, the more building will be done, and the more copper will be needed. (This is true for other metals as well.) Peak credit will likely determine peak demand. (Or perhaps the limit will be determined by net energy available for uses such as mining.)

It seems to me that most of what we are seeing can be explained by these factors.

What we see in the world production graph is continuous growth in copper use, as world economies grow. It may be that one area of the world grows faster than another, as one area reaches lower ore concentration, or has lower labor costs. I would expect costs and production to vary with the six things listed above.

It seems to me too, that the when the peak occurs and the shape of the downside of the curve, is likely to be defined by the above factors…”

(Rdan and re-cycling efforts over the globe….). Anyway, a neglected part of the puzzle at AB to consider.

Update: Barkley Rosser wrote a good piece on China here

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