Do Negative Household Savings Really Matter? Q3 2005

Individual investors, in terms of financial assets they control, are the largest and most important players in the U.S. capital market.

Therefore, when Federal Reserve Flow of Funds data shows household personal savings for the quarter running a negative $132.0 billion (annual rate), as occurred in Q3 2005, we need to ask, “Does this matter?”

The media often cites these statistics, claiming that Americans are throwing prudence to the winds, spending more than they make:

Americans saving less than nothing: Spending could outstrip income in 2005, which hasn’t happened since the Depression” (San Francisco Chronicle, January 8, 2020)

Spendthrift nation: Americans have stopped saving for a rainy day“, (Christian Science Monitor, August 3, 2020)

Monetary Zombies: If individuals and families continue to spend more than they make, millions of us may also end up in the land of the living dead.” (The Nation, January 20, 2020 )

What Are ‘Personal Savings’?

The first thing to note about ‘personal savings’ is that the Federal Reserve statistics are intended to meet economists’ definitions, which is quite different from that of ordinary people.

(See: “Saving“, by Professor Laurence J. Kotlikoff of Boston University)

Second, even economists have problems matching data with the ideal concept of ’savings’.

(See: “What’s Behind the Low Personal Savings Rate?“, by Milt Marquis, Senior Economist of the Federal Reserve Bank of San Francisco).

Third, there are conflicts between accounting practice, tax law, modern finance, and ordinary usage — confusing the issue. A advocate of a particular position can exploit ambiguities and make a case that Americans are either saving too little or too much.

Finally, ‘personal savings’ statistics are based on data with substantial uncertainties, not the least of which if the size of the underground economy. (In 2003, the discrepancy in the Flow of Funds Table F100 was greater than the amount calculated as personal savings!)

In other words, we shouldn’t lose sleep about the ‘personal savings’ statistic because it’s difficult to fathom its significance. Furthermore, the matter is not that important in Capital Flow Analysis, other than as an insight into the psychology of the market.

Capital Gains Are Not Counted

Government measures of personal savings exclude capital gains and losses, realized or not. This might make some sense if we were only talking about unrealized profits, but shouldn’t realized capital gains be counted as income?

For example, for more that a decade, U.S. households have been net sellers of equities in annual amounts of tens, even hundreds of billions of dollars. At the same time, domestic corporations have used company profits to repurchase these same equities in similar amounts.

These two capital flows are related as the statistical manifestation of buyback/option schemes that serve as remuneration to employees and executives of public companies. These are not paper profits, but real money that beneficiaries can invest or keep in a bank account.

(See: “Buybacks and Options“)

However, economists do not consider this form of remuneration to be ‘personal income’ because benefits from stock options come as capital gains.

Accountants do not consider these amounts rewarded employees to be a corporate expense, and require that stock buybacks be charged to capital accounts — by-passing profit and loss. However, tax authorities take a commonsense approach and regard capital gains on stock options as taxable income.

In other words, buyback/option programs serve to overstate corporate profits and understate the personal savings rate of U.S. households.

Americans Are Not Really Spendthrifts!

Now, this might just be an technical curiosity, except that total net sales of equities by U.S. households over the decade 1995-2004 amounted to US$2 trillion!

Most of this represented a transfer of cash from corporate coffers to employee option holders as remuneration. This was about 3% of the amount reported as ‘personal income’. Adding this to ‘personal savings’ would increases the U.S. savings rate for the decade from 2.8% to 5.8%. Suddenly, Americans are not such spendthrifts!

The personal savings statistics also exclude capital withdrawn from non-corporate business, which over the decade 1995-2004 totaled US$507.1 billion.

When adjusted for estimated profits on stock buybacks and withdrawals of capital from non-corporate business, the U.S. savings rate for the decade rises to 6.5%.

This is one example of the uncertainty surrounding the U.S. rate of personal savings. The Federal Reserve Board of San Francisco’s Economic Letter (above) points out others, such as the fact that personal expenditure on education and training are treated as consumption, stating the such accounting practices overstate consumption and understate saving.

In other words, don’t get excited about supposed spendthrift Americans without better data.

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