Power & Market

Personal Saving Rate Falls to 10-Year Low in November

01/16/2018Ryan McMaken

In November 2017, the personal saving rate in the United States fell to a ten-year low, dropping to 2.9 percent. The last time the saving rate was lower than 2.9 percent was during November of 2007. 

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The Wall Street Journal reported last month that Americans are spending more and saving less: 

Americans spent more and saved less in November, a sign that low unemployment, robust consumer confidence, the prospect of tax cuts and buoyant financial markets are underpinning a strong holiday shopping season.

Americans are saving at the slowest pace in a decade, likely in anticipation of continued job and wealth gains as stock indexes barreled to new records last month and the unemployment rate stood at a 17-year low.

If we look at saving rates in the wake of the financial crisis, we find saving rates quickly moved upward as consumers were unsure of the future and cut back on spending. Now, with employment growth solid, households are assuming that present conditions will continue, so are saving less and less. 

Last week, we looked at how median net worth in the United States, as of 2014, was still below where it had been in 2001. It remained significantly below where it had been in 2007. 

One of the reasons given (in an NBER report) for the stubbornly low net worth among Americans was the fact that Americans were neglecting to save money. In many cases, they were paying down debt, but we are also witnessing a troubling trend in which Americans are selling assets to pay off debts. But, as the report noted, "the reduction in assets was greater than the reduction of debt."

Debt continues to be a factor: 

The sharp fall in median net worth and the rise in overall wealth inequality over these years are traceable primarily to the high leverage of middle class families and the high share of homes in their portfolio. The racial and ethnic disparity in wealth also widened considerably. Households under age 45 saw their relative and absolute wealth declined sharply. Rather remarkably, there was virtually no change in median wealth from 2010 to 2013 despite the rebound in asset prices. The proximate cause was the high dissavings of the middle class, though their debt continued to fall. 

As a final note, we might also consider saving in a larger historical context. Here we see personal saving as a percentage of disposable income. 

In this case, at 3.8 percent in 2017, it has not returned to its pre-Great Recession levels, but of course remains well below where it was during the 1950s and 1960s, when it often reached above ten percent. 

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Poor Logic from Forbes and Paul Tudor Jones

01/03/2018Hunter Lewis

As the Austrian School has pointed out, the ultimate source of human poverty and failure lies in poor logic.

Here is an example from Forbes Magazine and a leading hedge fund investor who is also a major charitable donor genuinely devoted to helping humanity and the planet.

The editor of Forbes, Randall Lane, quotes Paul Tudor Jones, as follows

There is no bigger threat to our democracy than wealth disparity. It is a story normally reserved for monarchies, dictatorships and plutocracies….We got into this pickle because over the past 40 years the corporate focus on profits took on manic proportions relative to other stakeholders such as employees, communities and the planet.

There are several things wrong with this logic. In the first place, a focus on profits is not at odds with a focus on employees, customers, communities, or the planet. Profit, properly defined, is the net present value of all future profits, that is, what you should be able to realize by selling that profit stream today. To maximize profit, therefore, one must take a long term view and seek to provide exemplary service over many, many years to employees, customers, communities, and the planet. What Paul Tudor Jones is describing is not profit maximization, but rather short term profit taking, which will actually reduce the net present value of all future profits. As Henry Hazlitt pointed out in Economics in One Lesson, real capitalism focuses on the long run, not just the short run, and considers all consumers, not just some.

The problem of course is that we have never had the benefit of real capitalism. Thanks to the interventions of government into the economy, and especially into the pricing system, we get crony capitalism instead. This is bound to happen in a monarchy or dictatorship. But, contra Mr. Jones,  it is no less likely to happen in an American style democracy, as American history has shown. So long as government influences, manipulates, or controls prices, powerful special interests will strive to use the power of government to gain monopolies or other advantages. There are, however, certain periods in which government ( and in particular central bank) policy puts crony capitalism on steroids, with a resultant sharp increase in economic inequality,  and that is what we are seeing today.

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Political "Tribalism" is the Consequence of Centralized Power

11/21/2017Tho Bishop

This clip from MSNBC's Morning Joe went through my Facebook feed earlier, with the show's panel pointing to the willingness of Alabama Republicans to vote for Roy Moore as an example of "extreme" tribalism that has taken over American politics. As Willie Geist put it:

If you're willing to protect the tribe at the cost of a 14-year old girl, you need to re-evaluate yourself.

Now, living in Alabama, I know many Moore defenders will dismiss the legitimacy of the original claims made against him. Putting aside the specific details of the case, it's hard to argue with Mr. Geist's point - if you are truly willing to sacrifice a 14-year old girl simply for the sake of your "tribe", then it may be worth evaluating your actions.Of course, the case of Roy Moore isn't a particularly unique one. Whenever allegations of inappropriate behavior are made against an individual that wields political power, the natural reaction to defend or attack an individual often coincides with how close their political views are to yours. 

In fact, one of my favorite articles that has emerged in light of recent allegations came out last week in the Washington Post after allegations emerged about Senator Al Franken. Written by a "feminist" who "studies rape culture", she is refreshingly honest by admitting that she would never want Democrats to take action against Franken simply because he's better than any Republican.

If I believed for one second that Franken is the only Democrat in the Senate who has done something like this, with or without photographic evidence, I would see that as the best and most appropriate option. But in the world we actually live in, I’m betting that there will be more. And more after that. And they won’t all come from states with Democratic governors and a deep bench of progressive replacements. Some will, if ousted, have their successors chosen by Republicans.

In other words, if we set this precedent in the interest of demonstrating our party’s solidarity with harassed and abused women, we’re only going to drain the swamp of people who, however flawed, still regularly vote to protect women’s rights and freedoms. 

While it may be fair to argue that this reaction is "tribalistic", it's also quite rational. 

After all, politics is simply war by other means - and you tend to prefer an SOB on your side over an enemy choir boy.

The solution, of course, is to change the battlefield. If we take away the power Washington has, and allow politics to be played out at the State and Local level, then America will no longer be a country in which we are required to force our political beliefs on everyone else. Instead, we would all have genuine options about the style of government we live under. 

As the scope of government America continues to grow, we will see political tribalism only grow.

Until that trend reverses itself, a politician's political affiliation will always matter more than his morals. 

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Police Priorities: Prosecuting Locals for Rude Bumper Stickers

11/16/2017Ryan McMaken

A county sheriff in Texas has run afoul of the social media mob when he publicly announced on Facebook that he was seeking to press charges against a local resident known for using the F-word on a sign on his vehicle. 

Social media readers responded with the expected protests over freedom of speech when Sheriff Troy Nehls posted a photo of the offending truck and announced the local district attorney "has informed us she would accept Disorderly Conduct charges regarding it." 

Numerous other sites have focused on the First-Amendment implications of the situation. But let's focus here instead on the use of taxpayer-funded resources by a county employee:

In essence, the Sheriff is seeking to make an arrest over what amounts to a rude bumper sticker. 

By announcing that he has met with or called the local prosecutor, and may have charges filed, the sheriff is threatening the owner of the truck with state violence that may include arrest, fines, and perhaps even a short period of imprisonment. 

Given all the effort the Sheriff has gone to, a reasonable person might conclude that there is essentially no crime at all in Fort Bend County. 

However, in spite of the fact that the Sheriff acts like he has nothing better to do, it turns out that Fort Bend County has its share of crime. 

Indeed, according to the FBI's crime statistics, the Fort Bend County in 2016 reported a total of 758 violent crimes. This included 18 homicides, 83 rapes, 141 robberies, 516 aggravated assaults. Property crimes included 269 auto thefts. 

The population of the county is approximately 580,000, which means the homicide rate is around 3.0 per 100,000. That's not an especially high homicide rate by American standards, but it's not an especially low one, either, especially for a high-income suburban area like Fort Bend County. 

In other words, the county has its share of crime, but the Sheriff is more concerned with waging petty battles over bumper stickers with local residents, rather than focus on prosecuting violent criminals, or on recovering stolen property. 

In the past, here at mises.org, we've noted how with any organization — including law enforcement agencies — time spent on one activity necessarily reduces the resources spent on other activities. The often-used police claim that police "must enforce all the laws" has always been nonsense since there are limited resources available. 

Thus, there is a real opportunity cost to tracking down people with naughty words on bumper stickers, while there are also 500-odd aggravated assaults per year. 

This should surprise no-one of course, since the Sheriff's department is not subject to any market discipline and is guided more by how well it can lobby the county government for a bigger budget, and how well the Sheriff is at getting votes from the local population. This fracas over a bumper sticker, of course, is likely little more than a political ploy, given that the Sheriff apparently has ambitions for higher office. 

It may be that this publicity pays off well for the Sheriff. Local victims of crime, however, may fare less well. 

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Paul Volcker Looks Pretty Good Right about Now

10/31/2017Jeff Deist

With Trump poised to announce his pick for Fed Chair on Thursday, former Fed boss Paul Volcker quietly announced the forthcoming publication of his memoirs. Hopefully we will be spared a shamelessly self-serving title like Bernanke's The Courage to Act. But in contrast to the fanfare surrounding post-retirement books by Alan Greenspan and Bernanke, Volcker's offering likely won't resonate with the financial press. It's been 30 years since he served as Chair (1979 to 1987), and many of the principals in his story are dead or elderly. It all sounds like ancient history, especially to the under-40 quants populating Wall Street. In fact the 90 year old Volcker is mostly unknown both to the public today, though at 6'7'' he literally and figuratively once cast a long shadow across the central bank. 

But faint vestiges of his legacy survive, even in this sordid era of "extraordinary" monetary policy. David Stockman largely praises Volcker in The Great Deformation, reminding us that the former Chair "did not...dream of levitating the economy through the "wealth effect' or by coddling Wall Street speculators."  Stockman also praises his willingness to steer short-term interest rates well above long-term bond yields, thus throttling the carry trade that is the target of Stockman's unrelenting ire today. And unlike the madcap QE excesses of Bernanke and Janet Yellen, Volcker was not afraid to attack monetary inflation head-on, through the Fed's balance sheet:

Volcker accomplished this true anti-inflation objective with alacrity. By curtailing the Fed’s balance sheet growth rate to less than 5 percent by 1982, Volcker convinced the markets that the Fed would not continue to passively validate inflation, as Burns and Miller had done, and that speculating on rising prices was no longer a one-way bet. Volcker thus cracked the inflation spiral through a display of central bank resolve, not through a single-variable focus on a rubbery monetary statistic called M1.

Murray Rothbard, needless to say, held all Fed Chairs and Governors in low regard-- bemoaning what he considered their "hagiographic treatment" by the press. Paul Volcker did not escape his withering pen:

When it looked for a while that the great Paul Volcker might not be reappointed as Fed chairman, the financial press went into a paroxysm of agony: no, no, without the mighty Volcker at the helm, the dollar, the economy, nay even the world, would fall apart. And yet, when Volcker finally left the scene years later, the nation, the economy, and the world, somehow did not fall apart; in fact, ever since, none of those who once danced around Volcker for every nugget of wit and wisdom, seem to care any longer that Paul Volcker is still alive. 

Yet by current standards there is much to admire in Volcker's tenure at the Fed.

First, he was (and likely will remain) the last Chairman even remotely worthy of the title "Fed hawk." As Stockman makes clear, Volcker understood the argument for monetary tightening-- an argument completely lost to political concerns today. Second, he demonstrated (for awhile) actual political independence during both the Carter and Reagan administrations and was willing to abide a short-term recession. Finally, he understood the critical role interest rates and saving played in the lives of ordinary people depending on thrift rather than investing savvy. 

Paul Volcker is no Austrian. But in our neo-Keynesian world of unbridled monetary stimulus, and compared to his successors, Paul Volcker looks pretty good. 

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Personal Saving Falls to Lowest Rate Since 2007

10/30/2017Ryan McMaken

According to the US Bureau of Economic Analysis, the US saving rate hit 3.1 percent in September. September's rate was the lowest saving rate reported since December 2007, when the rate was 3.0 percent. 

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The BEA defines personal saving as equal to personal income less personal outlays and personal taxes.

While the current rate represents the lowest rate in nearly a decade, the rate had fallen even lower during the expansion between the dot-com bust of 2001 and the beginning of the 2007-2009 recession. It had fallen to 1.9 percent in July 2005 which remains a multi-decade low. 

Total saving fell during the third quarter of this year to the lowest level reported since the first quarter of 2008. 

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Moreover, the year-over-year change in personal saving has declined for the past seven quarters in a row. During the past 50 years, saving has never been negative for so long, although the saving rate did decline for five quarters in a row during the lead-up to the 2001 recession. It also fell for five quarters in a row in the wake of the 1990-91 recession. 

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The decline in saving could be due to several factors. Asset-price inflation (as with housing prices) may be leading to lower saving rates as home owners and renters are left with less to save in response to higher monthly payments for housing. Nearly a decade of very-low interest rates may also be encouraging consumers to increase spending. Subprime auto loans, appear to be growing in popularity with lenders. Indeed, lenders are so flush with cash they want to lend that there's a now a subprime auto-loan program for refugees. And, of course, declining savings could also be due to psychological factors related to the current bubble economy. For many consumers, 2008 now seems like a distant memory. While fear of financial hardship spiked saving rates in the wake of the last recession, many consumers may simply be assuming that there's little risk of a severe economic shock, so saving ceases to be a top priority for many households. 

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PredictIt Markets: Powell Clear Favorite for Fed Chair

10/24/2017Tho Bishop

Last week reports surfaced that Trump was "impressed" by his interview with Dr. John Taylor to fill the role of Fed Chairman. The markets at PredictIt.org, however, aren't buying it.

As he has for most of October, Jerome Powell, himself a current Fed governor, is seen as a heavy favorite to replace Janet Yellen next year.

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While it would change the name on the Eccles Building letterhead, Powell's nomination would be a full endorsement of the status quo in terms of monetary policy. Ben Bernanke has described Powell as a "moderate and a consensus builder," in the beltway such qualities tend to be as dangerous as they are dull.

Should Trump follow through with Powell's nomination, it will be interesting to see if the appointment faces any pressure from Republicans. Nominating Powell over Taylor or Kevin Warsh will dash the hopes held by some influential conservatives that have been pushing for moderate rules-based Fed reform. Also working against Powell is his connection to Barack Obama. As Bloomberg noted this week, 23 Republican Senators voted against Powell last time his name came up for a vote to fill another Fed position in 2014. It will be interesting to see how many flip now that the nomination is coming from a Republican, rather than a Democrat. 

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