Families Hoard Cash 5 Years After Crisis
hosted.ap.org
hosted.ap.org
It's also either misinformed, or misleading. A statement like "Shunning debt and spending less can be good for one family's finances. When hundreds of millions do it together, it can starve the global economy." is false. Engaging in deficit spending in ones family would be a great idea if you had an unlimited line of infinite forgiveable-borrowing at 0% from a reserve bank. Similarly saving in the global economy could create large amounts of spare capital that would drive investment in real productive goods and services with healthy returns, if your savings investments weren't being front-run by a central bank with the legal right to print currency.
The investment/reward money pricing mechanism (interest rates) are beyond broken, they are corrupted. People saying this were once branded insane, and then libor was revealed. It goes on. This being said, the underlying movement by people leaves me with hope. It's good to see a lot of people paying down their debt, saving their money, choosing to take the financial medicine now, rather than later when the flavour will be even more bitter and possibly deadly.
Are those states inevitable so we shouldn't try to anticipate or prevent them from happening or do we make them happen on purposes (read: does a minority manipulate the cycles to its benefits) ?
If anyone could accurately and consistently predict these movements, they could and would be acted against for great profit. That is a simple market indicator that it is not possible.
No, boom and bust cycles are not made on purpose. In related news, the Queen is not a lizard.
In the U.S., debt per adult soared 54 percent in the five years before the crisis. Then it plunged, down 12 percent in 4 1/2 years, although most of that resulted from people defaulting on loans. In the U.K., debt per adult fell a modest 2 percent, but it had jumped 59 percent before the crisis.
- SHUNNING DEBT: In the five years before the crisis, household debt in the 10 countries jumped 34 percent, according to Credit Suisse. Then the financial crisis hit, and people slammed the brakes on borrowing. Debt per adult in the 10 countries fell 1 percent in the 4 1/2 years after 2007. Economists say debt hasn't fallen in sync like that since the end of World War II.
The article calls this "plunged" "shunning", but it looks a lot more like a tiny hiccup to me.
The people writing this stuff live in a fantasy land where the rich took a 25% fall one year,but jumped right back on 10% gains the very next year... so why isn't EVERYBODY making plenty of money? They have absolutely no clue that WE took a 25% hit..but regular folk are lucky to have an aggressive 401k hit 7% in a year...
Not to mention that the rich just RAISED THE PRICE of everything to get their money back faster.
The entirety of the book's text is available on the website.
In a more realistic situation - when a big chunk of the GDP is used to pay down debt, the resulting decrease in spending causes the economy to run below capacity and unemployment to be high. This is why low interest or stimulus is helpful - it encourages the economy to produce at its full capacity even though spending by individuals is reduced. This is necessary UNTIL private debt has been payed down and the economy is able to run at full capacity on its own.
For a good time google "labor force participation rate graph" at images.google.com. Unemployed people after unemployment runs out don't tend to go on shopping sprees.
Another fun one is looking at disposable income after real world inflation rates (not .gov imaginary rates). Especially as median income continues its permanent inflation adjusted decline.
The final whopper is plankton always do the opposite of profitable. So after a major drop, they sell, after a major rise, they buy. So if this article is vaguely trendsetting plankton going back in to the market to buy, thats a major sell signal. We've had a reasonably long ride up from the bottom; seems about right time to sell as the plankton buy. This kind of data is why I still pay attention to financial infotainment "news". Just like the classic stories of you know its time to sell when your shoeshine boy owns stocks in late 1920s or your hairdresser owns multiple california houses in mid 2000s, if the plankton are being encouraged to go all in, that is a very strong sell signal for those who know how to to listen.
Harry Browne's passive investment strategies continue to make money over the long term. Don't have to have a passive permanent portfolio strategy implemented, but not even knowing such a concept exists is plankton-ish.
Make decisions based on delta value, not plankton, make decisions based on delta price, plankton.
There we go, nail on the head. In the age of HFT-induced flash crashes, high profile systemic scandals (LIBOR, FB-style IPO abuse, and so forth), predatory and dubious bank foreclosures in the news -- individually these things make people skittish but combined they portray an acidic environment that does little else than subtly eat away at any gains you make.
Cheap credit has its advantages, however the very notion of "cheap credit" is worrying. If the economy is in shambles, then why do we get cheap credit? There's a distinct sense that it just isn't sustainable.
That means new home purchases, car purchases, and every day spending like entertainment or food or clothes goes down because at some point you just don't have the money to do those things.
When people free up their cash flow they can actually spend MORE because more of the money is going to actual buying of things and not just servicing debt. Servicing debt doesn't create jobs, it creates risk for the consumer and the bankers financing them. If the consumer loses their job, they could default on their house, credit cards, educational debt, etc.
In short, if our economy is built on debt, especially consumer debt, it is built on a shaky foundation of risk and uncertainty. The debt-based spending isn't real and it costs everybody a lot of money over time.
A reversing of that trend is a good thing.
Also, a few years of saving money will change the spending habits, and there is no way to switch back to spending more money immediately. Nobody will say "hey, I got enough money now, let's go spend!"
The saving need came as a shock when the banks collapsed. The only shocking way to get people back to spending more is winning the lottery, but that's not a group option.
As stated above, the intrinsic problems haven't been addressed at all.
Not sure what the population at retirement age is going to do. My parents are semi-retired e.g. laid (sic) off. My dad is 72 and still looking for work.
Icing on the cake: the stupendous amount of debt owed by college grads.
Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen
[shillings] and six [pence], result happiness. Annual income twenty pounds,
annual expenditure twenty pounds ought and six, result misery.
ps -- yes, you too can save money. For example, I use a crappy android phone on a cheap plan and don't have cable. Those two choices alone save me roughly $2k/year; over 10 years that's $20k. I'm not saying those should be your things, but I bet you've got something.
The money I save on not having Sky TV (or similar) gives me some cash in the bank and fresh roasted coffee delivered to my door each week. I save money and get coffee! I find my life slowly filling with things that make it better and memories of fantastic experiences, without spending anything extra.
We didn't get seat covers at our wedding, because I wouldn't remember anything about them now. We used some of that money to get some really nice flowers, which became nice gifts and is something everyone liked.
> I know that virtually no matter what goes on with my employer I have plenty of time to find a new job.
It also means the answer to the question "What's the worst that can happen?" starts to become "Things will be generally fine". That's a phenomenal weight to be lifted.
As a bonus you will get much lower fees than if you contributed to a 401k that does not have employer matching. Check out Vanguard.
It's not a substitute for having some amount of hard cash, but 6 months hard cash is a lot to have lying around IMO. There is going to be some risk depending on how you choose to invest.
I totally agree WRT to the freedom and peace of mind, that is huge for me.
http://www.cepr.net/index.php/blogs/beat-the-press/do-people...
"[...I]t is just wrong to imply that consumption is currently depressed. It isn't. The saving rate in the first half of 2013 was less than 4.3 percent. This is less than half of the average saving rate in the 1960s, 1970s, and 1980s. It is lower than the saving rate at any points in the post-war era except the peaks of the stock and housing bubbles. Unless we see a return of a bubble, there is no reason to expect consumption to increase further relative to income."
Just noticed that in 2010, he writes the same thing responding to an article complaining about a 5.8% savings rate. Three years later, with the savings rate decreasing by 1.5% and a complete lack of retirement savings amongst baby-boomers, it's still not enough spending for financial pundits.
http://www.cepr.net/index.php/blogs/beat-the-press/washingto...
Growth to be sustainable can't be debt fuelled, so it's hardly the fault of consumers for not spending, especially if their discretionary spending power isn't increasing.
Business confidence is picking up which should lead to more growth in that sector, combined with more employment - which is healthy growth, people get jobs and thus have discretionary income again.
However government doesn't need to save at the same time as households in business. It can employ unemployed resources to build public goods and provide public services. The extra spending will create a multiplier effect - when the government spends, someone will spend out of his pocket. The multiplier effect is present empirically when short-term safe asset interest rates are near zero (as is now - the liquidity trap) or if exchange rates are fixed - something that fits well theory as well.
The Economics of Depression are called "Keynesian" - the set of tools, observations and policy proposals that are shown to work when in such a crisis. They are again fashionable with young stars in economics creating new Keynesian-expired models. All of the criticism of this "Depression economics" is usually valid during normal times, but this is an extraordinary event.
The talking heads and politicians never like stimulus - its use implies a different mode of the economy, its much easier to just continue talking as before. Debt isn't an issue, because stimulus from defence spending right before WWII was done with much bigger debt-to-GDP, inhereted from WWI in most countries that did it.
Three countries had a successful stimulus package in the last crisis enacted big - China, South Korea and Germany. The third one has the luxury of being a proponent of austerity after fixing the demand gap the first year.
The United States hasn't had net stimulus. The package was too little to offset the huge spending cuts at state and local level.
If you don't like stimulus a second best idea is to forgive debt when the debtor cannot pay, to increase inflation (hard), and to at least refrain from cutting government spending. No mainstream economic model recommends austerity. The classical types recommend smooth changes in spending, the Keynesian-type fiscal stimulus, the Austrians and other Liquiditionists are a joke.
Structural reforms are intended to improve long-run trend growth. This doesn't matter when you cannot return to the previous path.
There is an entire (respected) school of economics that disagrees that Keynesian economics works. I'm not here to argue which side is right, since I am not an economist, but to simply state the Keynesian economics are the "Economics of Depression" and then dismiss the Austrians as a "joke" is ridiculous.
>>The talking heads and politicians never like stimulus - its use implies a different mode of the economy, its much easier to just continue talking as before. Debt isn't an issue, because stimulus from defence spending right before WWII was done with much bigger debt-to-GDP, inhereted from WWI in most countries that did it.
From what I have seen, this is pretty much the opposite of true. The Democratic Party in the US has been extremely pro-stimulus basically since Obama's election (your point about state level cuts negating its efficacy may be true, but that doesn't mean there isn't a large group of politicians that are pro-stimulus). Most of the talking heads I have seem pretty pro stimulus, and they definitely are anti-austerity.
A crash in confidence in households can pull out trillions of dollars of funds from stocks, and put them into low yield bonds - governments can't come close to this kind of economic effect. The change in consumer behaviour - also ultimately derived from confidence - also has a massive effect.
Similarly, confidence has an effect on businesses - but this appears to have been short term compared to the change in household behaviour in this downturn (according to the article.)
Governments cuts or spending pale in comparison - the economic levers of central bankers and treasury ministers are hardly connected to anything.
PEDANTIC NOTE: I'm not saying governments can't influence economies at all - they can, through laws and regulation of transactions that influence micro behaviour - just that people make such a big deal out of fiscal policy when actually this is nearly irrelevant to how well the economy actually does. Also, obviously, governments that get into too much debt will cause all sorts of problems, but these are mostly the knock-on effects of a crisis of confidence (they may need to use big one-off taxes and the like,) not because spending fast and loose itself damages an economy.
There's an additional problem though: if a politician throws a lever too far and over-compensates for a problem they get blamed. But if a politician doesn't throw a lever far enough, the blame stays with the original problem.
For example, the coalition in the UK is very fond of blaming the economic crisis on the previous government/ in particular the prime minister Gordon Brown, who was chancellor (finance minister) for many years before that. The problem is that they confuse the blame - arguably, he might be partially responsible for loosening the regulation that allowed mortgages to get out of control, but the new government blames his imprudent spending for the crash - or at least they imply is when they say the solution is to balance the books, whatever the human cost (their cuts are extremely hard on people with disabilities - there are stories of people with cancer/heart disease being ordered back to work, and occasionally dying of shock when they find out. The assessments are carried out by random company staff rather than medics.)
They are also now starting to take the credit for the extremely tentative recovery - which will, if this lack of confidence holds, come back to bite them on the arse sometime soon. If not, it will bite them in 8-10 years when the next crash happens.
I do agree, though, that the levers they had could have an effect if they overuse them - but maybe that would be rather drastic and unpredictable. I think better way to influence behaviour (as I tried to allude to in GP comment) might be to change laws and regulations - this way you can target much more specific aspects of the way micro interactions work, and (subject to the usual unexpected economic hackery) would have a more predictable effect. Maybe.
Another confusing thing I've seen during reporting on the financial crisis is conflicting views on the prices of housing. Prices were sky-high during the boom, and to me it seems plainly obvious that they were not the correct value and needed to return to normal. Yet falling house prices are reported negatively, and rising prices are cheered. I can see why individually some people (home owners) would want to have rising prices, but surely overall a return to the sort of pre-boom valuations overall are what we should be aiming for. Oh well, not entirely sure what I'm trying to say, maybe just "Finance is weird"?
As far as regional markets and economies, the trend of housing prices is an important health indicator, hence the tendency to cheer rising prices.
The people who want rising prices probably quite often would also benefit from dropping prices.
People who treat their primary home as an investment and/or have investments in property may benefit from rising prices. Even if it is by second mortgages or by trading down to release equity.
But I'd guess most home owners want to trade up or get something roughly the same most of the time when they move - our choice of house is usually constrained by price. And then dropping prices is generally preferable, as we'll get more for our money.
The caveat is that I of course don't want the prices to drop so far that I'm left without equity for a new deposit. A slow steady drop that leave us able to finance a decent deposit after covering our mortgages would be the best deal for most house owners, and generally far better than price increases (that it is probably pretty much impossible is another matter - it'd distort demand badly because people would suddenly want to wait, and be able to aim far higher when they do make the jump)
The reporting of house prices, as you say, really badly reflects this. Presumably because people see the value of their home as a proxy for their wealth, given that it is likely to be substantial compared to savings and other investments for most house owners.
Combined that with a depressed real-people economy (money economy is doing fine, working people economy, no so much) it is a lot safer to build a good interest rate on your savings by simply saving more.
[NB Not being snarky - I just remember the HN entry recently that mentioned the growth in off balance sheet financing.]
But you can keep an eye on "easy" things like cash flow. A company that can run on 100M of cash and produces 1B of cash per year is very unlikely going to go so under that it won't be able to pay its creditors, for example.
Aside from his advice ignore advice merely to diversify and hope. Diversify advice comes from old people still thinking in 10% return eras long ago. If you're getting 10% and have 20 diversified investments the failure of one is no big deal, even if you lost it all thats only a 5% loss and everything else returned a 10% gain for the year, so you really only lost 6 months. On the other hand, if you're getting 2% and have the same investments and one fails, then you've lost 5% and thats 2.5 years of growth where you'd have been better off putting the money in the mattress. And over that 2.5 years some other company will probably tank too leading to a cascading effect where "investing" your money at 2% or whatever is basically speculation/gambling you're better off picking up pennies from in front of steamrollers.
Now diversification does help with "return OF capital" its just no longer useful as a "return ON capital" technique. You lose one of your 20 investments you're wiped out for a quarter decade, but at least you haven't lost all your money... yet.
A relatively simple implementation of this has given me a 13.46% return over the past three years.
Side question: How long is one allowed to hold an ETF for?
As short or long as you want? You can algorithmically trade them in microseconds or buy and hold until you die and pass them to your heirs.
You can hold an ETF as long as you please, or as short as you please, they're traded exactly like stocks. The only caveat is that leveraged ETFs really are intra-day holdings only, because they can do very strange (and bad) things if you hold them long term.
The problem with low interest rates / low returns isn't so much a cherry picked three years from last trough to current near peak, but longer term. Look at the yield of the SP500 from 2000 to 2010 for a decade long perspective, for example. That's where losing a couple percent is a big deal.
And the point remains however, that "Diversification" isn't really something that can be accomplished with 10 stocks.
Bonds are, generally, less risky than stocks, but piling too much into bonds is not the safest way to go. Stocks can offset bonds risks.
Diversity, diversity, diversity.
Stocks now are totally over priced, and investing in bonds is not wise when the central Banks are printing money.
So the best thing you can do is use your money on yourself in a productive way.
I mean, plenty of people say that stocks are over- or under-priced. But study after study shows that their predictions, on average, fail to beat the market. Study after study shows that someone whose predictions or buys were better than average one year fail to beat the market the next year. Study after study shows that market timing does not work.
I'm not trying to be a jerk, but it always baffles me when highly intelligent, scientifically-minded people completely ignore the vast stores of evidence we've gathered about their likelihood of beating the market.
And this is of course how macroeconomics is designed to work: Inflation makes "green paper" unappealing, which stimulates investment in productive activity, which generates products and services, which compete for the greep paper, which curtails inflation.
Saving cash in the mattress¹ (or buried in the back yard) is not a hedge against inflation. Could it be for tax avoidance reasons? Is Switzerland one of the countries that taxes savings balances?
¹ the joke here is that that's the "First Savings Bank of Sealy Posturpedic", a large mattress maker.