Monthly Archives: February 2014

Why Is Saving Bad?


Why is it that for individuals, saving money is bad for the economy?  I understand that something like 70% of GDP is consumer spending, but isn’t saving really just indirect spending?

This “saving is bad” theory leads to all kinds of harm, mainly (obviously) to savers.  Which includes lots of retirees, as well as pension funds, and the industries that fund those groups, like insurance companies.

Here’s Eric Horowitz (ht Dish):

Even if individuals draw some emotional benefit by saving inheritance money, from a social standpoint it’s better if people—and wealthy people in particular—spend their money on durable goods or semi-risky investments. Buying a blender or funding a start-up does more to stimulate the economy than leaving your money in a low-risk mutual fund.

It seems that the tendency to save inheritance money is another reason to support a higher estate tax. If mental accounting is preventing inheritance money from being spent in the most efficient way, that strengthens the case for raising estate tax revenues to fund welfare programs (and if you lean right and cringe at that word choice, just replace “welfare programs” with “other tax breaks for the wealthy that are more stimulative.”)

The relationship between tax policy and mental accounting is nothing new. The Obama administration famously designed tax cuts in the stimulus bill to be dispersed by withholding less money in regularly scheduled paychecks rather than by mailing out supplementary checks. The belief was that people would be less likely to save the money if they didn’t see it as something separate. We’ll never know exactly how effective it was, but even if it did increase consumer spending it was considered a political disaster because it kept citizens from learning how they benefitted from the stimulus.

But is that true, that saving is bad for the economy, while spending it on a blender is good?  What happens if you put your money in a “low risk mutual fund”?  Here’s where that money would go, using the example of 4 low risk mutual funds recommended by Kiplinger:

Vanguard Wellesley Income (symbol VWINX) is one of the most conservative stock-owning funds you can buy from Vanguard, which specializes in conservative, low-cost investing. Expenses are just 0.31% annually, and the fund yields 2.8%. Wellington Management has run Wellesley since its inception in 1970. The managers keep roughly 60% of assets in high-quality corporate bonds. Michael Reckmeyer, who runs the fund’s stock portion, invests the rest primarily in high-yielding blue chips. Over the past ten years through December 3, the fund returned an annualized 6.7%. By comparison, Standard & Poor’s 500-stock index retuned an annualized 1.2% over the same period. Wellesley is less than half as volatile as the S&P 500, and in 2008 it lost just 9.8% when the S&P 500 plunged 37%.

Of the funds on this list, FPA Crescent (FPACX) is my favorite (and a member of the Kiplinger 25). It’s more eclectic than the others, and much more flexible. Steven Romick, who has managed Crescent since 1993, adjusts its holdings based on his views on the economy and individual securities. He occasionally sells stocks short, betting on them to fall in value. He’s worried about global economic weakness and so had 33% of the fund in cash and 14% in bonds at last report. The rest is mostly in defensive stocks, such as health care and consumer staples. The fund returned an annualized 12.2% over the past ten years — tops among the funds mentioned here. Yet it’s almost 40% less volatile than the S&P 500. Crescent lost 20.6% in 2008. The expense ratio is 1.17%. This is not a fund you buy for income; the yield is a puny 1.2%.

Vanguard Wellington (VWELX) is Wellesley’s slightly feistier twin. Wellington Management has run this classic balanced fund since — get this — July 1, 1929. The fund gained an annualized 6.4% over the past ten years, including a 22.3% tumble in 2008’s collapse. It invests about two-thirds of assets in stocks and one-third in bonds. Expenses are 0.34% annually. Like Wellesley, it sticks to mostly high-quality bonds. Ed Bousa, who picks the stocks, focuses on large companies that pay dividends (the fund yields 2.9%). The fund is one-third less volatile than the S&P.

Its name is misleading, but T. Rowe Price Capital Appreciation (PRWCX) is nonetheless a fine fund. This is Price’s most conservative stock fund, typically with about 60% to 70% of assets in stocks. Unlike Wellesley and Wellington, manager David Giroux buys a wide variety of high-yielding securities, including junk bonds, convertible securities and leveraged bank loans. With the stock portion of the fund, he leans toward out-of-favor, dividend-paying stocks. The fund, which dropped 27.2% in 2008, is about 20% less volatile than the S&P. It has returned an annualized 8.9% over the past ten years. Capital Appreciation yields 2.0%, and annual expenses are 0.74%.

So, if you buy a low risk mutual fund, you are buying corporate bonds and stocks.  And some cash.  If you buy corporate bonds, you are giving corporations your money to spend as they see fit.  Presumably in ways that will positively affect their bottom line, thus, the economy in general.  On this graph (from ZH), wouldn’t we see any decrease in the personal consumption offset by an increase in fixed investments?

If you buy stocks, you must by definition buy them from someone else (or from the issuing company, same effect as buying bonds).  The seller will then buy something else with that money, right?  What about the cash?  That’s the only part of this equation, to me, that is genuinely not productive (today).  Banks are currently holding large reserves (beyond required reserves).  But there’s an argument to be made there that this is due to Fed policies, so if the government wanted more money circulating in the economy, there are ways the Fed could encourage banks to loan out some of that moldy money.  Then even putting money right into the bank, saving it the old fashioned way, would be the same as spending it.  More so, in fact, due to fractional banking.  A dollar saved would be worth $10 spent, right?

Confounding this question is the impact of credit.  There have been a lot of articles lately on how there is a rise in consumer debt, and this is a good thing, and America has started shopping again.  I’m not sure how this all fits in, but this post by Sober Look is really interesting, and related:

One could argue that student debt is in effect “crowding out” private credit.

Not seasonally adjusted (source: FRB)

Even the ex-student loan measure does not tell the whole story. The overall US economy (and the population) has grown since the financial crisis and in order to make a fair comparison one needs look at the trend relative to the nation’s GDP. A very different picture emerges – one of significant consumer deleveraging that is only now beginning to stabilize.

Not seasonally adjusted (source: FRB)

While the absolute level of consumer credit indeed had a nice pop in December, one needs to look beyond the headline numbers to see the full picture.

It’s also interesting to compare this data to the personal savings rate, and let’s see it back to 1970:


So even though the savings rate has gone up recently, it really isn’t close to historical norms.  And even though consumer credit has decreased (although not when you include student loans, yikes!), it is also still outside historical norms.

Maybe the whole consumer credit/student loan debate belongs outside of the “savings is bad” question, but I think they are kind of related.


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China’s growth and the US

This post from Steven Roach is short but very interesting.

First he highlights the fact that, despite alarming headlines, China’s economy is NOT slowing down.  The GROWTH of China’s economy is slowing down.  Big difference.  A recession is when the economy actually shrinks.  This is nowhere near the case in China:

Yet a superficial fixation on China’s headline GDP growth persists, so that a 25% deceleration, to a 7-8% annual rate, is perceived as somehow heralding the end of the modern world’s greatest development story.

He also addresses all the current sky is falling scenarios under consideration:

This knee-jerk reaction presumes that China’s current slowdown is but a prelude to more growth disappointments to come – a presumption that reflects widespread and longstanding fears of a broad array of disaster scenarios, ranging from social unrest and environmental catastrophes to housing bubbles and shadow-banking blow-ups.

While these concerns should not be dismissed out of hand, none of them is the source of the current slowdown. Instead, lower growth rates are the natural result of the long-awaited rebalancing of the Chinese economy.

In other words, what we are witnessing is the effect of a major shift from hyper-growth led by exports and investment (thanks to a vibrant manufacturing sector) to a model that is much more reliant on the slower but steadier growth dynamic of consumer spending and services. Indeed, in 2013, the Chinese services sector became the economy’s largest, surpassing the combined share of the manufacturing and construction sectors.

But to me, the interesting part is how he sees the US relationship with China changing and evolving, and what that means for US:

China’s rebalancing will enable it to absorb its surplus savings, which will be put to work building a social safety net and boosting Chinese households’ wherewithal. As a result, China will no longer be inclined to lend its capital to the US.

For a growth-starved US economy, the transformation of its codependent partner could well be a fork in the road. One path is quite risky: If America remains stuck in its under-saving ways but finds itself without Chinese goods and capital, it will suffer higher inflation, rising interest rates, and a weaker dollar. The other path holds great opportunity: America can adopt a new growth strategy – moving away from excess consumption toward a model based on saving and investing in people, infrastructure, and capacity. In doing so, the US could draw support from exports, especially to a rebalanced China – currently its third-largest and fastest-growing major export market.

The term “emerging economy” sounds like something small, a seedling emerging from the ground.  But China’s economy, although defined as emerging, is huge, and profoundly impacts our own.  Most economic forecasts regarding China’s economy, and the US for that matter, analyze them as separate entities.  Viewing them as codependent, intertwined economies, as they actually are, requires more thought.  Actions within each economy have effects in the other.  Large, important effects.

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Visionary AND Rent Seeker

Barry Ritholtz has a post today about Elon Musk, referencing another post.  It seems that the business activities of Musk have been identified as rent-seeking, to small and large degrees.  The original author finds it upsetting that Musk’s enthusiastic backers identify him as a visionary of new technologies while in fact he is often a rent seeker (while citing Rockefeller as a more postive example of a visionary???  Maybe visionary in monopoly building).  Ritholtz finds this thought provoking.

Why can’t he be both?  If he is primarily a capitalist, then surely he recognizes that the largest rewards are currently being accumulated by rent seekers.  But if he is also a visionary, then he can produce to his vision, too.

Barry, go down the hall and ask Josh Brown if he is an insightful writer on the financial world as he sees it, or is he just trying to get as many clicks and page views as possible?  I mean, this is a guy who writes truly wonderful posts on optimism as a basis for financial planning, and then tweets photos of Kim Kardashian.  I don’t see these things as mutually exclusive.  (just annoying).

I guess as much as I hate rent seeking, I can’t blame someone who does it.  Especially if he is already working in a field where it is endemic.  Really, today, it is nearly impossible to compete against rent seekers without participating in it yourself to some degree.  The blame falls on those who make rent seeking possible.

For instance, here in Erie, PA, we have a development in the beginning stages for a hotel by the lakefront.  All private.  Then last week, the county council voted to approve a loan guarantee for a hotel project right next to that one, which will be owned by the Erie County Convention Center Authority.  So they can get cheaper loans.  Oh, and it will be off the tax rolls.

People aren’t either heroic visionaries or immoral rent seekers.  They’re just people.  So they can be both.

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Smart Meters

I don’t know anything about the pros and cons of smart meters, but this is an interesting post on an anti-smart-meter website.  Apparently Northeast Utilities does not feel they are a net positive for consumers.  Or obviously for their business, either:

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Income Inequality

I’m a big fan of John Mauldin.  He has a new post about income inequality, here.  It’s really good and thorough, with all the relevant graphs.  He’s covered almost every important point.  But I think he missed a big one.  He says:

…the top 1% is getting richer either by (1) allocating capital to the right places (which all right-thinking people want to see happen), or (2) by employing skills that most of the American work force does not have – because production increasingly depends on the hard work of creative workers with hard-earned skills gained through education and experience.

He also notes that while the top 1% is disproportionately receiving both income and wealth, the real beneficiaries are the top 0.01%, demonstrating it with this graph:


But what he did not cite as the main root cause of why the rich are getting richer is crony capitalism.  That is, regulatory capture.  Too big to jail.  You know, Fuld leaving Lehman with over $200M.  The fact that Jamie Dimon is not only a free man, but richer than you (and just got a big raise).  Laws written just so that the rich will necessarily get richer.  QE.  You get the idea.  It’s not really that the rich are taking from the poor (although they most certainly are), but it’s that they are taking all the gains in the economy before anyone else has a crack at them.

He did include it, almost as an aside, near the end of the post, lumped in with education reform:

What else can we expect as long as we continue to rely on a 20th century education system to equip 21st century workers? When we allow crony capitalism to create an unequal playing field with special benefits for some? When businesses successfully lobby to create barriers to entry for future competition so that they can maintain their profits without having to compete? When we give tax benefits that help a relative few so that we are forced to tax those who are productive at ever higher rates?

And he discussed how the government’s role should be to help everyone gain from change, as it occurs.  But I think he is really missing the bigger issue, that government is pretty much broken from the vantage point of the 99.99% (not just the 47%, or the 99%).  While some politicians may rail about income inequality, they are, in fact, at that exact same time, implementing policies to exacerbate it.  Knowingly.

Anyway, the post isn’t wrong.  It’s just a little off the mark.  Oh, and despite his best efforts I remain un-offended.

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via Andrew Sullivan:

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Austin, TX cops


From Chris Quintero, original post here:

Sitting at Starbucks, on the corner of 24th and San Antonio, I noticed a particularly odd situation. Two Austin Police officers standing outside the Castilian just lingering. Every time I looked back there was a different student holding a carbon copy of what looked to be a jay walking citation. Suddenly, one of the cops shouts at an innocent girl jogging with her headphones on through West Campus. He wobbled after her and grabbed her by the arm. Startled, and not knowing it was a cop, she jerked her arm away. The cop viewed this as resisting arrest and proceeded to grab both arms tightly, placing her in handcuffs. She repeatedly pleaded with them saying that she was just exercising and to let her go. She repeatedly cried out, “I did not do anything wrong…just give me the ticket.” The other officer strolled over and now they were making a scene. She tried to get up. I doubt she was running away as she was in handcuffs, but the second cop pushed her back down to the ground. Because of the commotion, they walked her to the cop car in the alleyway next to Big Bite, where she, overcome with frustration, yelled loudly to gain attention. Because of that, the cops tightened their grip causing her to squirm and kick. Then came two bike cops from down the alley. We now have four cops and one small, helpless girl in the back of a cop car, because she was just going for a run.

Update 2/24/2014:

Here’s what the head cop in charge had to say, from Daily Texas Online:

When arresting Stephen, officers took the appropriate actions, Acevedo said.

“I don’t buy that you can’t hear an officer yelling at you to stop,” Acevedo said. “I’ll give the benefit of the doubt initially, but when the officer is right by you and can see the hat and he’s looking at your face, you should be able to know what’s going on.”

Acevedo said Stephen disregarded the officer’s lawful request for her to identify herself and verbally resisted the arrest.

“All that young lady had to do when she was asked for her information was to provide it by law, “ Acevedo said. “Instead of doing that, she decided to throw [herself] to the ground – officers didn’t sit her down – and she did the limp routine.”

According to Acevedo, Stephen was handcuffed after telling the officer not to touch her. Acevedo said the public outcry following the arrest did not faze him.

“Thank you lord that it’s a controversy in Austin, Texas that we actually have the audacity to touch somebody by the arm and tell them ‘oh my goodness, Austin Police, we’re trying to get your attention,’” Acevedo said. “Quite frankly, she wasn’t charged with resisting, and she was lucky I wasn’t the arresting officer because I wouldn’t have been quite as generous.”

So, he sees nothing wrong with the whole incident.  Except her behavior.


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