What Goes In Must Come Out

Last modified on August 20th, 2010

It’s no secret that over the last few decades the economies of North America have changed from ones that favour saving to ones that favour spending. When interest rates were 10%, you could simply leave your money in the bank and watch it grow. Now with inflation rates of around 3% per year (which is typically caused by the government printing more fiat money), your purchasing power will decrease if you leave your money in the bank. That means that most of us are forced to put our savings into the Stock Market Casino and hope that black comes up more often than red.

With interest rates hovering around 0%, only a fool would leave the majority of their money in the bank. GICs are obviously an option, but unless you are making more than 3% per year, you’re just pissing money away as well. Also, GICs are illiquid, meaning that it’s difficult to get access to them in case of emergency (not without forfeiting whatever gains you would have made on them). A diversified stock/bond portfolio sounds like a good idea, but when everything is tanking at the same time, that’s kind of a downer as well.

Strangely enough one asset class continues to do fairly well, and that’s preferred shares for blue chip stocks such as banks. I don’t own any, mainly because I don’t have a grasp of the logistics involved in purchasing stocks and writing off capital gains on them, but returns of 6% due to company dividends aren’t unheard of for some Canadian Banks. Obviously companies aren’t obligated to pay out dividends, but many blue chips have a long history of paying out consistent dividends. Taking into account inflation, a return of 3% is relatively meagre, but a lot better than 0% or negative.

Down south the US real estate market has essentially been devastated, along with a large percentage of the savings for families who looked to their house as a form of retirement savings. With low interest rates, many families used their savings to buy bigger and better housing, then proceeded to use their house as a ATM machine to finance other purchases such as vacations and home upgrades. I read a stat a while ago that said more than 25% of home owners in the United States now have negative equity in their homes — they owe more than the house is worth. In fact, in some parts of the US people are literally walking away from their homes.

We’ve been told by financial experts that we should be saving around 10% of our income to fund retirements and for a rainy day. Most books I’ve read said the sign of a good economy isn’t spending, but it’s actually saving, since saving leads to capital investments which ultimately helps the economy grow. So having money grow in the coffers should be sign of good long term economic health.

Which is why it’s unfortunate that the current savings rate in the United States is almost 0%, the lowest level since the Great Depression. I haven’t been able to find any stats for Canada, but I suspect at most it’s just a few percentage points above the US rate.

It gets worse. Not only are families unwilling or unable (most likely the latter) to save, they are starting to pull their money from their retirement savings. 401k withdrawals hit a 10 year high this year. Given that most families are significantly unprepared for retirement expenses, this can only end badly.

The continued government response to the shoddy economy is to try and toss more money at it, often in the form of printed or borrowed money. All that’s doing is inflating the bubble even further. Eventually the bubble has to pop, at which point many of the artificial gains made by people in both the stock market and the housing market will be wiped away. It will be painful, but it needs to happen to return the economy back to fundamentals instead of one based on free credit and massive speculation.

3 responses to “What Goes In Must Come Out”

  1. smithdm3 says:

    Actually, for the last few years in the US the savings rate has been increasing – one of the reasons their economy has stumbled.

    From the US Bureau of Economic Analysis (Tuesday, August 3, 2010):

    Personal saving as a percentage of disposable personal income was 6.4 percent in June,
    compared with 6.3 percent in May.

    The personal saving rate (personal saving as a percentage of DPI) was revised up for all 3 years: from 1.7 percent to 2.1 percent for 2007, from 2.7 percent to 4.1 percent for 2008, and from 4.2 percent to 5.9 percent for 2009.

    Sadly, I think Canada’s is probably lower. It is somewhere around 3% according to Bank of Canada’s latest Monetary Policy Report (http://www.bankofcanada.ca/en/mpr/pdf/2010/mprjuly10.pdf).

  2. Duane Storey says:

    A lot of numbers vary depending on whether or not they include debt repayments as savings. I’m guessing the BEA data includes debt repayments. It also varies whether or not you look at personal, business, or government.


    The economy is going to take a hit as people go from spending to savings, for sure. But spending on random items doesn’t really help to grow the economy, it just helps grow the GDP. True economic growth takes capital, which often comes in the form of savings.

  3. Duncan says:

    Well said. True growth required capital to flow into productive output. The whole notion of consumption = growth has proven to be such flawed logic. Consumption accounts for 70% of GDP in the US an Canada. Our economies have shown artificial growth over the last several years and the party has come to an end. Governments are trying to maintain the consumption based model throwing more and more money into the fire pit.

    I believe that by the end of next year, the proverbial shit will hit the fan and we’ll see the real correction take place. Rates will shoot through the roof, real estate prices will fall even further than anyone imagined, unemployment will skyrocket as companies cut jobs due to lack of sales. Food and energy prices, along with taxes in almost all categories will rise significantly for those working and not on food stamps(someones got to pay for all of those unemployed)

    The biggest blow to America though will be the collapse of the dollar(think Germany back in the world war times).

    As happened in Germany, foreigners will buy up everything that’s not nailed down along with prime recreational real estate. Americans will be the third world workers serving the neuvo rich foreigners (Asia).

    I’m brushing up on my landscaping skills!

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