Why John Q. Public Can't Sock It Away
Chairman Greenspan, in his monetary report to Congress, applauds the "quite remarkable" U.S. budget surplus ("Greenspan Signals Rate Boosts May End6," July 21). But the Fed's written report reveals the darker side of the ledger -- the personal savings rate is at historic depression levels. Why can't Johnny save?
When John Q. Public pays taxes to Uncle Sam, his nominal wealth is reduced. The "accounting identity" is that the government surplus equals the non-government (resident and non-resident) deficit. Johnny is a resident, as are domestic businesses. The budget surplus, along with the trade deficit, means that domestic savings go to both foreigners and Uncle. U.S. residents can't net save with Uncle and foreigners in surplus.
With Johnny's savings tied up in pension plans, IRA's, etc., he reduces his net savings by borrowing to spend beyond his income. And despite higher interest rates, Johnny's household, mortgage and credit-card debt increased at annual rates of 8%, 7% and 10% in the first quarter.
What happens as Johnny nears his credit limits? Sales slow as Johnny's spending slows. Inventories increase, jobs are lost, output, profits and income slow, as do tax payments, while unemployment compensation rises. All this causes Uncle's surplus to become deficit. Suddenly Johnny is both out of work and, ironically, saving again.
The CBO's 10-year surplus projection of $4.56 trillion is, by definition, projecting equally reduced savings for the rest of us. But don't count on it going that far. The decelerating GDP, rising inventories, rising jobless claims, sideways stock market and negative yield curve may be telling us the party's nearly over.
Warren B. Mosler
Director of Economic Analysis
West Palm Beach, Florida
Wall Street Journal
Posted August 9, 2000