Enlightened Economics

There is good news coming. Americans are about to save more, much more. A new consciousness is dawning. It is one that brings enhanced balance to Americans material and inner personal lives as they re-evaluate their futures due to changed circumstances. Boomers approaching retirement are seeing their homes decline in value, their stock market investments in difficulty, and concerned about government support—are realizing the importance of savings as never before.

Recently, U.S. tax-payers received up to $600 in cash from their government. It seems that Americans are choosing to save it. In May 2008 the savings rate as a percentage of personal disposable income shot-up to 4.9% and in June to 2.5%. This occurred after the rate was near zero for about three years and the lowest since 1933. These higher savings rates are just the beginning of a trend that I believe will crest with savings rates in excess of 10% in the next few years.

Higher savings rates will eventually create a new economic equilibrium and allow for vigorous economic expansion. However, until this new economic equilibrium emerges, the increased savings rates have some downsides. It begins with a significant reduction in consumer expenditure. The U.S. is the world’s leader among developed countries in having the highest consumption relative to its gross domestic product (GDP). Stephen Roach of Morgan Stanley shows that U.S. consumption is about 71% of GDP, compared to 56-57% in most other developed countries. The U.S. average for the years 1975–2000 was 67% of GDP, and for 1950-1975 around 64%. Now the U.S. is likely to head back to the latter figure.

Why Americans will save more
Another consequence of lower consumption will be further downward pressure on Americans most important asset – their homes. Until recently, Americans saw their homes as the safe place to invest in and build equity for retirement. But they now understand this strategy may not work well in the future. Purchasing a home for investment purposes will be de-emphasized. Home prices are likely to fall even further, scaring particularly those boomers to save in other ways.

In addition, declining consumption could mean even lower stock market returns than even the abysmal ones seen in recent years. Adrian Ash in his article, The Decade of No Returns, says, “… the total return [capital gains and dividends] on the S&P500 [the pre-eminent U.S. large companies stock index] was actually negative for the decade ending on 30th June 2008.” The numbers were adjusted for inflation as well. By far the largest proportion of Americans’ stock investments are held in companies that make-up the S&P 500 Index.

Incidentally, if you account for the declining value of the dollar internationally, then performance of the S&P 500 delivered a negative real return of about -20 to -40% over the past 10 years! And Americans investing in S&P 500 companies did also participate significantly in the growth of foreign market as well. Such revenues grew rapidly to around 40% of total S&P 500 sales during this period.

Therefore Americans planning to retire in the next few years cannot rely on the stock market to replicate its gains seen between 1980 and 2000, to fund their retirement. They simply have to save more and place some of those savings away from the stock market. (Note: I do not anticipate Americans abandoning stocks. And there will be some market sectors that will do very well even if the broad market struggles.)

Boomers also have to question the ability of the U.S. government to fund their medical needs and pensions in retirement, as the U.S. government is in one heck of a hole – a hole of around $70 TRILLION! The enormity of this funding gap cannot be easily grasped. But let us try. In an article, U.S. ‘fiscal gap’ paving the road to meltdown, by Derek DeCloet in the Canadian Globe & Mail he states, “To earn $70-trillion in profit, you’d need 1,723 companies the size of ExxonMobil; $70-trillion would be equal to the annual sales at 1.35 million Wal-Mart stores. [Now that’s]… not the size of the U.S. government’s debt, though. It’s the shortfall between its projected future revenues and what it plans to spend (in today’s dollars).”

It is evident from the U.S. government’s financial position that its promised benefits to its citizens could be cut significantly – while substantially raising taxes as well. In such an environment boomers have no other option but to urgently save a heck of lot more now.

A new consciousness arising bringing balance to spending and saving
Americans, whether they be boomers or from generations X, Y and Z, are at the cusp of a new consciousness. They will bring a new balance to their material life and inner desires. The rapidly changing financial picture together with a fundamental shift in their consciousness concerning what is important in life, will place a renewed emphasis on savings. In years to come, this will be seen as a great turning point for the American economy, a turn towards a more balanced Enlightened Economics.

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© Ron Robins, 2008.