August 18, 2005
Personal Savings Rate Hits Historic Lows
Each month, the Commerce Department's Bureau of Economic Analysis issues the personal savings rate. In June, that rate of savings fell to zero for the first time since the 9/11 attacks. If we stay on this pace, the savings rate for the year will come in at under 1%. We have not seen a savings rate that low since the great depression.
Some people interpret this number as a decidedly negative portent. It suggests that, as a nation, we are spending more than we earn. We are not putting away the necessary funds to get us through emergencies, much less retirement.
Federal Reserve Chairman Alan Greenspan has repeatedly warned that the low savings rate is impairing the nation's long-term economic prospects.
Others suggest that this number is not so significant as some would have us believe. The personal savings rate leaves out capital appreciation on securities and homes. So while our savings rate is declining, our net worth is increasing.
The question boils down to how much stock do you put in rising home equity? Do you want to count on a rising stock market to float your boat?
Personally, I have little or no confidence in either. I am not saying I
believe we are in a housing bubble that will burst any time soon - although I
could make the argument. I am not saying that I think we are in a secular bear
market - though I could make that case as well. (Others have already made those arguments as well, or better, than I could so I have liberally sprinkled links to them throughout this post.)
I don't believe in predicting what comes next because I don't think anyone can. Everyone is just guessing. What I do believe is that you cannot stick your head in the sand like an ostrich and hope neither of those two things come to pass.
You don't have to be an economist. All you have to do is look at a few data points and what has happened in the past and you have to concede that both of those are possible: We could be in a housing bubble that if it bursts, would hurt a lot of people who have the majority of their net worth tied up in real estate; and it is also not impossible that we are in a secular bear market with the recent market activity being just a hibernation period.
If we can agree on these two points, then I think the lack of personal savings is worthy of hand-wringing. What do you think? Leave your thoughts and comments below.
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
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