Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Investing in the Tulip Crypto Mania 2021 - 19th Jun 21
Here’s Why Historic US Housing Market Boom Can Continue - 19th Jun 21
Cryptos: What the "Bizarre" World of Non-Fungible Tokens May Be Signaling - 19th Jun 21
Hyperinflationary Expectations: Reflections on Cryptocurrency and the Markets - 19th Jun 21
Gold Prices Investors beat Central Banks and Jewelry, as having the most Impact - 18th Jun 21
Has the Dust Settled After Fed Day? Not Just Yet - 18th Jun 21
Gold Asks: Will the Economic Boom Continue? - 18th Jun 21
STABLE COINS PONZI Crypto SCAM WARNING! Iron Titan CRASH to ZERO! Exit USDT While You Can! - 18th Jun 21
FOMC Surprise Takeaways - 18th Jun 21
Youtube Upload Stuck at 0% QUICK FIXES Solutions Tutorial - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations Video - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations and Trend Analysis into Market Correction - 17th Jun 21
Stocks, Gold, Silver Markets Inflation Tipping Point - 17th Jun 21
Letting Yourself Relax with Activities That You Might Not Have Considered - 17th Jun 21
RAMPANT MONEY PRINTING INFLATION BIG PICTURE! - 16th Jun 21
The Federal Reserve and Inflation - 16th Jun 21
Inflation Soars 5%! Will Gold Skyrocket? - 16th Jun 21
Stock Market Sentiment Speaks: Inflation Is For Fools - 16th Jun 21
Four News Events That Could Drive Gold Bullion Demand - 16th Jun 21
5 ways that crypto is changing the face of online casinos - 16th Jun 21
Transitory Inflation Debate - 15th Jun 21
USDX: The Cleanest Shirt Among the Dirty Laundry - 15th Jun 21
Inflation and Stock Market SPX Record Highs. PPI, FOMC Meeting in Focus - 15th Jun 21
Stock Market SPX 4310 Right Around the Corner! - 15th Jun 21
AI Stocks Strength vs Weakness - Why Selling Google or Facebook is a Big Mistake! - 14th Jun 21
The Bitcoin Crime Wave Hits - 14th Jun 21
Gold Time for Consolidation and Lower Volatility - 14th Jun 21
More Banks & Investors Are NOT Believing Fed Propaganda - 14th Jun 21
Market Inflation Bets – Squaring or Not - 14th Jun 21
Is Gold Really an Inflation Hedge? - 14th Jun 21
The FED Holds the Market. How Long Will It Last? - 14th Jun 21
Coinbase vs Binance for Bitcoin, Ethereum Crypto Trading & Investing During Bear Market 2021 - 11th Jun 21
Gold Price $4000 – Insurance, A Hedge, An Investment - 11th Jun 21
What Drives Gold Prices? (Don't Say "the Fed!") - 11th Jun 21
Why You Need to Buy and Hold Gold Now - 11th Jun 21
Big Pharma Is Back! Biotech Skyrockets On Biogen’s New Alzheimer Drug Approval - 11th Jun 21
Top 5 AI Tech Stocks Trend Analysis, Buying Levels, Ratings and Valuations - 10th Jun 21
Gold’s Inflation Utility - 10th Jun 21
The Fuel Of The Future That’s 9 Times More Efficient Than Lithium - 10th Jun 21
Challenges facing the law industry in 2021 - 10th Jun 21
SELL USDT Tether Before Ponzi Scheme Implodes Triggering 90% Bitcoin CRASH in Cryptos Lehman Bros - 9th Jun 21
Stock Market Sentiment Speaks: Prepare For Volatility - 9th Jun 21
Gold Mining Stocks: Which Door Will Investors Choose? - 9th Jun 21
Fed ‘Taper’ Talk Is Back: Will a Tantrum Follow? - 9th Jun 21
Scientists Discover New Renewable Fuel 3 Times More Powerful Than Gasoline - 9th Jun 21
How do I Choose an Online Trading Broker? - 9th Jun 21
Fed’s Tools are Broken - 8th Jun 21
Stock Market Approaching an Intermediate peak! - 8th Jun 21
Could This Household Chemical Become The Superfuel Of The Future? - 8th Jun 21
The Return of Inflation. Can Gold Withstand the Dark Side? - 7th Jun 21
Why "Trouble is Brewing" for the U.S. Housing Market - 7th Jun 21
Stock Market Volatility Crash Course (VIX vs VVIX) – Learn How to Profit From Volatility - 7th Jun 21
Computer Vision Is Like Investing in the Internet in the ‘90s - 7th Jun 21
MAPLINS - Sheffield Down Memory Lane, Before the Shop Closed its Doors for the Last Time - 7th Jun 21
Wire Brush vs Block Paving Driveway Weeds - How Much Work, Nest Way to Kill Weeds? - 7th Jun 21
When Markets Get Scared and Reverse - 7th Jun 21
Is A New Superfuel About To Take Over Energy Markets? - 7th Jun 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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
BrookesNews.Com

Gerard Jackson is Brookes' economics editor.

Copyright © 2008 Gerard Jackson

Gerard Jackson Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

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