Investor Behavior: Patterns of Savings and Capital Flow Analysis

Lesson: 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20

Lesson sections: 12 | 12A | 12b | 12c | 12D

Investor Behavior and Capital Flow Analysis: Patterns of Savings Investment Theory: Patterns of Saving

Patterns of Savings

During the last half of the 20th century, there have been several significant changes in investment patterns of U.S. households.

Towards the end of the century, Baby-Boomers began to see weakness in the social security system and the low-level of social security benefits compared to current lifestyles.

Short-term tax advantages, together with long-term tax deferral and awareness of the need to build retirement assets, provided incentives for a major shift in asset allocation.

Emphasis on Pensions

The most striking change in US investor behavior over these fifty years has been increased emphasis on pension reserves in the household balance sheet.

Pension reserves became a much greater part of household wealth.

This change accelerated in the 1970’s with ERISA and, in the 1980’s, with tax-deferred 401(k) investment accounts.

The percentage of wealth represented by equity in homes and consumer durables remained fairly stable over the period, although declining at the close of the century due to the boom in stock prices.

Inflationary Fears

At mid-century, memories of the Great Depression were strong.

The inflationary implications of central banking and abandonment of the gold standard had not yet caused widespread inflationary fears.

However, as government grew in scope, especially after Lyndon Johnson’s 'Great Society', a belief in permanent inflation became generalized and the popularity of life insurance declined compared to the first half of the century.

The following table shows the distribution of household wealth by decade:

Shifting Investment Patterns: U.S. Households
  1950s 1960s 1970s 1980s 1990s
Equity in Home & Durables
Deposits & Credit Securities
Stock & Mutual Funds
Life Insurance Reserves
Pension Reserves
Non Corporate Equity
Bank Personal Trusts

Inflation and tax-deductible interest encouraged borrowing for home purchase.

Stocks and mutual funds were also perceived as offering protection against inflation, based on historical performance.

However, it was not until the US Treasury issued bonds indexed to the cost of living in 1997 that low-risk, partial inflation protection became available.

Decline of Non-Corporate Business

The table also shows a relative decline in ownership of non-corporate business.

In the 1950’s, doctors, lawyers, stockbrokers and other professionals were prohibited from doing business as corporations.

Over time, these restrictions were lifted, causing a shift towards incorporated business.

The ease and low-cost of incorporation and the general understanding of the advantage of limited liability led millions of self-employed to incorporate.

By the end of the century, equity in non-corporate business had fallen from second to fifth place in the distribution of household wealth.

Savings Habits Tabulated

The table below, derived from the Federal Reserve flow of funds accounts, shows changes in the saving and investment habits over the last half of the 20th century.

(Click to Enlarge)

Structural Changes in the Capital Market

By the 1960s, U.S. investors had begun to move away from direct holdings of equities in favor of mutual funds.

By the late 1990s, almost 40% of the money used to acquire financial assets came from the sale of corporate equities.

By 1990, almost 40% of household money used to acquire financial assets came from the sale of equities.

If there was any 'irrational exuberance' driving the stock market, it came from the general public that placed blind faith in the Common Stock Legend and saved regularly in long-term 401(k) plans and mutual funds.

A substantial portion of the corporate equities that were sold in increasing amounts since the 1980s were redeemed and taken out of circulation by corporate executives as a result of the popular buybacks and options programs.

Another thing to note is the rise in popularity of securitized debt.

Whereas time and saving deposits were the favorite fixed-income investment of the 1950s, by the end of the century the public preferred money market mutual funds and direct investment in bonds.

Are Americans Really Spendthrifts?

We often hear complaints that Americans borrow too much and save too little.

The implication is that someday there will be a Great Reckoning when excessive credit card debt comes due.

Although many Americans are clearly over their heads in debt, the situation is probably not as bad as suggested.

The meaning of savings to an economist is different from that of the ordinary person.

The first thing we should note is that there is a big difference between the economists' definition of 'saving' and the commonsense meaning of the term.

The economists' definition of saving does not take into consideration:

Savings is a Relative Concept

A billionaire has little need to put aside part of current income for a rainy day. Americans are among the richest people on earth and have less reason to save than citizens of less fortunate countries.

Even so, the financial assets of the average American household surpass the financial assets of the average Japanese, a nation widely acclaimed for habits of thrift.


Before proceeding, check your progress:


In the year 2000, an important change in American patterns of savings, compared to 1950, was that in 2000:
Choice 1Savings in home equity exceeded pensions.
Choice 2Pension savings exceeded home equity.
Choice 3Home values fell compared to 1950.
Choice 4Standards of living were lower in 2000.
By the late 1990s, half of the money U.S. households used to acquire financial assets came from current income. The other half came from:
Choice 1Government subsidies.
Choice 3Lottery winnings.
Choice 2The sale of other financial assets.
Choice 4Gifts and inheritances.
Economists do not include the following in their definition of household savings:
Choice 2 Personal income less consumption.
Choice 3 Unrealized capital gains.
Choice 1 Assets received through inheritance.
Choice 4 Money invested in antique automobiles.

Investment Theory: Capital Flow Analysis: Patterns of Savings  learning module : return to lesson 12 >

Lesson: 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20

Lesson sections: 12 | 12A | 12b | 12c | 12D

Suggested Reading on Investment Theory of Capital Flow Analysis and Patterns of Savings
'The Morality of Spending: Attitudes Toward the Consumer Society in America, 1875-1940', Paperback, Daniel Horowitz

Historical insights into today's patterns of saving

'Getting and Spending: American and European Consumer Society in the Twentieth Century', Paperback, Susan Strasser, Charles McGovern, Matthias Judt, Daniel S. Mattern

Essays and insights in consumer spending.

'Explorations in the Sociology of Consumption: Fast Food, Credit Cards, and Casinos', Paperback, George Ritzer

How we got from a work-oriented to a consumer-oriented society.

'Paying With Plastic: The Digital Revolution in Buying and Borrowing', Hardcover, David S. Evans, Richard Schmalensee

An expert insiders look at the credit card industry.

'Republic of Debtors: Bankruptcy in the Age of American Independence', Hardcover, Bruce H. Mann

An essential historical perspective on American attitudes towards debt and bankruptcy.

“The Retirement Savings Time Bomb ... And How To Defuse It”, Paperback, Ed Slott

How the government takes away retirement savings and the nest egg of the average American.

'The Decline of Thrift in America: Our Cultural Shift from Saving to Spending', Hardcover, David M. Tucker

A history of thrift as a cultural force in America.

'The Fragile Middle Class: Americans in Debt', Paperback, Teresa A. Sullivan, Elizabeth Warren, Jay Lawrence Westbrook

A sizeable portion of the American middle class teeters on the edge of economic failure.

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