Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20
China Recovered in Q2. Will the Red Dragon Sink Gold? - 23rd Jul 20
UK Covid19 MOT 6 Month Extensions Still Working Late July 2020? - 23rd Jul 20
How Did the Takeaway Apps Stocks Perform During the Lockdown? - 23rd Jul 20
US Stock Market Stalls Near A Double Peak - 23rd Jul 20
Parking at Lands End Car Park Cornwall - UK Holidays 2020 - 23rd Jul 20
Translating the Gold Index Signal into Gold Target - 23rd Jul 20
Weakness in commodity prices suggests a slowing economy - 23rd Jul 20
This Stock Market Stinks - But Not Why You May Think - 22nd Jul 20
Protracted G7 Economic Contraction – or Multiyear Global Depression - 22nd Jul 20
Gold and Oil: Be Aware of the "Spike" - 22nd Jul 20
US Online Casino Demographics: Who Plays Online For Money? - 22nd Jul 20
Machine Intelligence Quantum AI Stocks Mega-Trend Forecast 2020 to 2035! - 21st Jul 20
How to benefit from the big US Infrastructure push - 21st Jul 20
Gold and gold mining stocks are entering a strong seasonal phase - 21st Jul 20
Silver Eyes Key Breakout Levels as Inflation Heats Up - 21st Jul 20
Gold During Coronavirus Recession and Beyond - 21st Jul 20
US Election 2020: ‘A Major Bear Market of Political Decency’ - 21st Jul 20
Summertime Sizzle for Gold and Silver - 21st Jul 20
Overclockers UK Custom Built PC Review - Delivery and Unboxing (3) - 21st Jul 20
Will Coronavirus Vaccines Become a Bridge to Nowhere? - 20th Jul 20
Stock Market Time for Caution?  - 20th Jul 20
ClickTrades Review - The Importance of Dynamic Analysis and Educational Tools in Online Trading - 20th Jul 20
US Housing Market Collapse Second Phase Pending - 20th Jul 20
Capitalising on the AI Mega-trend - 20th Jul 20
Getting Started with Machine Learning - 20th Jul 20
Why Moores Law is NOT Dead! - 20th Jul 20
Help the Economy by Going Outside - 19th Jul 20
Stock Market Fantasy Finance: Follow the Money - 19th Jul 20
Did the Stock Market Bubble Just Pop? - 19th Jul 20
Quick Souring of the S&P 500 Stock Market Mood - 19th Jul 20
The Six-Year Jobs Recession - 19th Jul 20
Silver Demand Exploding! - 18th Jul 20
Tesco Scraps Covid Safe One Way Arrow Supermarket Shopping System - 18th Jul 20
The Rise of Online Pawnbroking - 17th Jul 20
Gold Rallies Together With U.S. Covid-19 Cases - 17th Jul 20
Gold & Silver Measured Moves - 17th Jul 20
The Bizarre Mathematics Of How Negative Interest Rates Create Stratospheric Profits - 17th Jul 20
From a Stocks Bull Market Far, Far Away, Virus Doomsday Scenerio! - 16th Jul 20
Fiscal Cliffs and the Self-destructing Treasury - 16th Jul 20
Dow Stock Market Crash Watch - Update - 16th Jul 20
Gold & Silver Gaining on US Dollar Weakness - 16th Jul 20
How to Find the Best Stocks to Invest In - 16th Jul 20
Overclockers UK Custom Build PC Review - 2. System Build Changes Communications - 16th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Savings and the US Economy- Fallacy of Including Home Ownership in Savings

Economics / US Economy Mar 24, 2008 - 08:33 AM GMT

By: Gerard_Jackson

Economics Best Financial Markets Analysis ArticleA while ago David Malpass, financial writer and chief economist at Bear Stearns, (and I do mean that Bear Stearns) argued that US savings are under reported because they exclude "cash flow improvements from realized gains on equities, houses, and mortgage refinancing." Now I am not referring to Malpass as a means to take a swipe at Bear Stearns and the quality of its advisors: that's the market's job. What Malpass did was to inadvertently draw attention to the confusion that reigns among the economic commentariat with respect to the nature of saving and its critical importance for economic welfare.

Most economists define savings as deferred consumption. But this is a very misleading definition that confuses the demand to hold cash with savings. To the Austrian school of economics savings is a process that defers present consumption in favour of greater future consumption by expanding the capital structure and by doing so increases future output. This definition clearly excludes cash balances. Using the Austrian definition we see that "cash flow improvements from realized gains on equities" cannot in themselves be defined as savings. To be savings they must be invested .

Housing is a consumption good, not "a form of savings" as so many economists would argue. The fundamental difference between a capital good (future good) and a consumption good (present good) is that the services of a capital good are indirectly consumed while the services of a consumer good are directly consumed. Menger, the founder of the Austrian school, not only treated capital goods as something concrete rather than abstract he also explained that these goods have to be arranged in a particular order so that they formed an integrated whole. He therefore stated that

The classification of goods into means of production and consumption goods (goods of higher order and goods of first order) is scientifically justified . . . (Carl Menger, Principles of Economics , Libertarian Press, Inc., 1994, p. 303).

It follows that the fundamental difference economic difference between a hamburger and a house is not durability but time. In the hands of consumers they become consumer goods. While the direct services of a house can be consumed over many years, the services of a hamburger are consumed in minutes. On the other hand, capital goods are used to directly and indirectly produce consumer goods. Another defining feature of capital goods is that they are reproducible, i.e., land is not capital. Some Austrians disagree on the point of capital and durability. Hayek considered houses to be capital goods "so far as they are non-permanent". Additionally,

we have to replace them by something if we want to keep our income stream at a given level... (Frederich von Hayek, The Pure Theory of Capital , The University of Chicago Press, 1975, pp. 77-78).

The problem here is that if durability becomes a defining factor what is to stop anyone from classifying vintage cars, televisions, books, furniture, cutlery, wedding rings, etc., as capital? The result is that capital would lose its true meaning. We can now see that the misunderstanding stems from confusing durability with capital goods. Durability is incidental and in no way can define a capital good.

It therefore follows that the US Commerce Department is perfectly correct in defining "money used to pay down a mortgage into the same basket as money used for everyday consumption". Are pension funds savings? Well what Americans call 401(k) deposits are savings but only to the extent that they fit the Austrian definition of investment. Where any 401(k) deposits are "invested" in consumption goods they become 'dissavings'.

As evidence that Americans are saving it has been noted by some commentators that the Forbes 400 have increased their net worth by an enormous amount during the last several years . So what? Considering the amount of credit the Fed has poured into the US economy over the last few years much of this wealth might turnout out to be largely illusionary. One only has to be reminded of the recent collapse of Bear Stearns to realise just how quickly paper wealth can be wiped out.

Unfortunately, the idea that home ownership should be included in any measure of savings is a fallacy that just won't die. Treating this type of equity as saving leads to the absurd view that because the United States has the highest rate of home ownership in its history Americans cannot therefore be spendthrifts. But as I have already explained, houses are consumption goods. Any genuine investments liquidated in favour of housing are dissavings.

For example, if some investors sell their shares in order to buy much larger houses they are clearly dissaving. Whether their actions would result in a fall in total savings depends entirely on whether others in the market place increase their savings by at least the same amount. The fact that their houses are assets doesn't change this situation any more than if they spent their money on vintage cars. To state what should be a truism: while all savings are assets, not all assets are savings.

Although entrepreneurship is what drives an economy it is savings that fuel it. Without savings an economy will eventually regress and living standards will fall. So are Americans putting enough away to satisfy their future material aspirations? I honestly don't know. However, the lesson that Asians understand and many Americans now need to relearn is that savings and not consumption underpin living standards. And this is why the Democrats' proposed tax increase could sink the US economy.

According to Irwin M. Stelzer: "The era of free-market, no-government-intervention purists is over, if indeed it ever existed". ( The Credit Crisis of 2008: As was the case a century ago, it's good to have a J.P. Morgan when you need one, National Review Online , 31 March 2008, Volume 013, Issue 28). Stelzer relates the case of the Knickerbocker Trust Company that capsized in 1907 when the boom bust. Fortunately for shareholders J.P. Morgan came riding to the rescue. As is usual with economic pundits, Mr Stelzer got it wrong.

At the root of the boom and the Knickerbocker collapse was a monetary expansion set in motion by the system of reserve city and central reserve city banks. When the expansion ceased a credit crunch emerged and the Knickerbocker company found that the securities it had accepted as collateral were now worthless. Once again, the real lesson has not been learnt.

By Gerard Jackson

Gerard Jackson is Brookes' economics editor.

Copyright © 2008 Gerard Jackson

Gerard Jackson Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Thomas Auletta
24 Mar 08, 22:43
Explain why savings are so low

As economist Ravi Batra has stated, since the late 1970's productivity has not kept up with wages. For the middle class, everything has gotten so expensive, how can they save???

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules