Greenspan's worry was justified: if Americans don't save, the U.S. will
inevitably become a huge debtor nation, an event that will undermine our
prosperity and, given the exigencies of the democratic system, destroy the value
of our currency.
And he certainly had his facts right: during the past 20
years, the Savings Rate (the percentage of income that is saved) has fallen from
about 11% to about 0%, as you can see from the graph below.
Why has this
happened? Why do Americans save so much less today than they did five, ten, or
twenty years ago?
Historically people have saved mostly for two reasons.
First, they save so they can remain financially solvent if they lose
their job or their business becomes unprofitable or they become sick or they fall
victim to a calamity of some kind. During the past half century, however, the
effect of such considerations has lessened, thanks mostly to mandatory government
insurance, pension plans, and the welfare state's ready willingness to pay for
all sorts of things.
The second reason why people save is to get interest.
Of course, they save more when the compensation they get for saving is higher
than when it is lower.
Through most of history, the supply of money was relatively stable, and
interest rates — the price of borrowing money — were a matter of supply
and demand. Rates were worked out between people who wanted to borrow —
whether to expand a business enterprise or to acquire consumer goods — and
people who were willing to lend, thus foregoing the expansion of their own
business activities or postponing the acquisition of consumer goods.
About
a century ago, all this changed. During the Progressive Era, people came to
believe that interest rates were too important to be allowed to fluctuate in the
marketplace. In 1913, the Federal Reserve Act was passed by Congress, creating
the Federal Reserve System and endowing it with powers to control interest rates
by either increasing the supply of money (more of anything lowers its price) or
constricting its supply (less of anything raises its price). Since then, as a
result, interest rates, at least in the short term, have been pretty much
absolutely controlled by the Fed, which today is pretty much absolutely
controlled by Alan Greenspan.
This leads to an interesting question: if
Greenspan is so worried about the savings rates, why doesn't he simply increase
interest rates?
But before we can charge him with creating or exacerbating
the problem of low savings, we should explore the more fundamental question: do
low rates inhibit savings? Of course, the commonsense answer to this question is
an unequivocal "Yes." But common sense sometimes leads us astray. Is there
evidence in the real world? Are there hard data? Can we identify the relationship
between the yield on savings and the savings rate?
Several years ago, in
an attempt to explore this issue and get a handle on what interest yields
actually are, I postulated a new economic indicator. In a simpler era, when
inflation was negligible and there were no taxes on interest, the yield on
savings was identical to the nominal interest rate: if your bank paid you 2.5% on
your savings, your actual yield was 2.5%.
But the imposition of income
taxes in 1913 and the rise of inflation that resulted from turning control of the
money supply over to the Fed, a problem exacerbated when the gold standard was
abandoned in 1933 made the issue much more complex.
Today, a typical money
market yield (I use the figure for Merrill Lynch Ready Assets Trust) is 2.13%: if
you invest $1,000 at 2.13%, you will get $21.30 in interest over the course of a
year. But you won't receive the full $21.30. You'll have to pay taxes on that
amount. Currently, the marginal federal income tax rate is 35%, which reduces the
yield to $13.85.
But thanks to persistent inflation, the value of both the
interest you earn and the money that you saved declines. Currently, the Consumer
Price Index stands at 3.0%, which means that the $1,000 you invest at 2.13% will
be $970 at the end of a year, and the $13.85 after-tax income you receive amounts
to $13.43. So the $1,000 you saved, with the interest that it nominally earned,
has purchasing power at the end of a year of $983.42. Your actual yield is
-1.66%. That's right: you lose money when you save.
I call this figure the
True Yield on Savings (TYS). I started calculating it about five years ago. I
wrote an article about it in Liberty's February 2002 issue ("Today's Crazy
Investment Environment"), in which I noted that the yield was negative.
I
have since obtained the data needed to track TYS back to 1985, which you can see
in the graph to the right. As you can see, TYS has varied considerably, ranging from +3%
to -3%.
Well, how does the Savings Rate correlate with TYS? Take a look at the graph
at the bottom of this page.
In statistical terms the correlation is .432.
My statistical friends tell me that this correlation is not perfect, but it is
considerable.
The curious thing is that so far as I know, Greenspan has
never acknowledged his personal responsibility for the collapse of saving in this
country despite the fact that, as head of the Fed, he virtually controls interest
rates. So long as he keeps rates so low that investors lose money on their
savings the situation is not going to improve very much.
One can only
speculate about why he has kept rates so low that Americans no longer save. He
certainly knows the consequences. My best guess is that he has acted for
political reasons, trying to keep the stock market strong and buoy Americans'
confidence in the economy for as long as he can.
Back in the early 1990s, Greenspan increased interest rates to stimulate
saving and prevent serious inflation. The Democrats responded by focusing on the
economy during the 1992 election campaign. Remember Bill Clinton's campaign
adage: "It's the economy, stupid!" And the voters responded by turning out of
office a Republican who had just won a war with Iraq. I suspect that Chairman
Greenspan had learned his lesson — and that now it's time for the rest of us
to learn one, too. It's somewhat more difficult, because the evidence is somewhat
more subtle. But it's much more basic and much more important.
We're not
earning any money by "saving." The government is manipulating the economy for
nobody's good but its own. Republicans and Democrats both do this; probably
Democrats do it for worse purposes than Republicans. But it's about time that we
all learned what's going on. Call it a lesson in economic reality.
|
|
