Sunday, July 21, 2013

Savings rate collapses due to tax hikes. Thanks, Obama!

Take a look at this chart of the personal savings rate. You'll see that it shot higher after that huge dividend payout by corporations in Q4 2012. They were concerned about coming tax hikes and all the fiscal cliff stuff so they decided to "dissave." Those savings then went to people.

But then taxes were raised on Jan 1, 2013 and a big component of those tax increases included the payroll tax hike that President Obama backed.

So what happened?

All of those savings have been wiped out. Where did they go? To the government.

Thanks, Obama!


Unknown said...

Well, as long as the real return for sovereign debt holders is protected or increased, all is well with those who matter, no? Royalty and sech?

mike norman said...


Geoff said...

Household net worth recently hit a new high of over $70 trillion. Perhaps they don't feel a need to save anymore. Maybe a little "dissaving" is exactly what the economy needs right now. As the private sector dissaves, we are seeing the govt save, i.e. the deficit is dropping. Seems like the sector balances are doing their thing.

Tom Hickey said...

Private debt still way high by historical standards. o way to begin another cycle with private leverage so high, especially when a Ponzi stage is still winding down and credit standards are tighter than normal.

Geoff said...

Tom, by what measure do you say that private debt is too high? It looks OK relative to assets, which for me is the key metric.

Tom Hickey said...

The issue is debt service and the ratio to look at is debt to income. For the economy as a whole this is public and private debt to GDP national income). When private debt is very high and public debt is not offsetting sufficiently, then debt service is an issue. Either govt needs to increase its offset to create space for deleveraging, or net exports have to increase, or private incomes need to increase. But govt is retrenching, net exports are not increasing sufficiently, and private incomes are stagnant, in fact the real wage has been falling.

Sure, people can sell assets and some have to do so for debt service, but that results in lower asset prices if it becomes a trend.

Neet exports are not going to grow in a weak global economy, and it is unlikely that firms are going to invest more or pay higher wages with demand weak, banks are reluctant to lend for lack of qualified customers, and so govt has to continue to step up to the plate. Instead, the deficit has declined under President Obama.

Unknown said...

or net exports have to increase, Tom Hickey

But where does the necessary domestic fiat come from since the interest for aggregate domestic debt is paid with domestic fiat? Does not the central bank create it in exchange for foreign fiat? Thereby driving up domestic prices for the sake of foreigners?

Does that not stink?

Geoff said...

Thanks for your reply, Tom. Comparing debt to GDP is mixing a stock and a flow. I prefer a clean look at the balance sheet. But if you want to look at the income statement, I believe the debt service ratio is healthier than it has been in quite some time. Sure, debt service costs could rise if interest rates do. Are you predicting a significant rise in interest rates?

Tom Hickey said...

Geoff, if you to a bank for a loan or credit card, the about the first things they will look at to qualify you is the amount of debt you are carrying, what the monthly debt service is, and how that relates to your documented income.

While it is true that debt is a stock and income is a flow, debt service that accompanies debt is a flow. Private debt is not dangerous as a stock but because it represent the flow of servicing the debt that represents a portion of income in the period.

Tom Hickey said...

Are you predicting a significant rise in interest rates?

The Fed raising rates while the government is retrenching fiscally at this time is reminiscent of 1937. What happens with rates depends on whether Ben realizes that. Given the rest of the stupidity, anything is possible.