saved is a penny earned."
saved is 1.39 cents earned if you’re in the top U.S. tax bracket."
Americans appear to be middle-class people. In the bell-shaped curve
of life, this is as it should be. That’s what makes the curve bell-shaped.
was a day when to be middle class meant to be thrifty. This is no
are basic habits that pre-baby boomers acquired. They
are habits associated with the 1950s: my generation. Some baby boomers
acquired them, too, but someone born in 1946 reached age 19 in the
era of the counter-culture. For millions of these people, the habits
of youth were scraped away, like a frying pan’s grease in a sand
tend to repeat the errors of their grandparents because they rebel
against the errors of their parents. The generation born in 1965—70
tends not to wear long hair. Platform shoes are out. Afro haircuts
are out. But the children born to the baby boomers are not echoes
of my generation. Too much of the frying pan’s Teflon surface got
scraped away in the sand storm. Bad habits now stick.
are today in the process of moving from the middle class to the
lower class. Here, I use the brilliant insight of Harvard’s political
scientist, Edward Banfield. In his 1970 book, The
Unheavenly City, he argued that class position is tied more
to a person’s assessment of the future than to the size of his bank
account. A future-oriented person is upper class, he argued. A present-oriented
person is lower class.
better reveals the class position of a person or a society than
the commitment to thrift.
AND ECONOMIC GROWTH
is a product of future-orientation. People forego spending today
in order to achieve even greater spending tomorrow. It is this attitude
that characterizes upper-class culture: "Spend your dividends,
never your principal." To a lesser extent, it characterized
the middle class of the pre-Beatles era. But for the middle class,
the stakes are higher and the required discipline greater. Unlike
the rich, who have amassed sufficient capital to be able to avoid
entering the job market, the middle class must amass capital out
of their wages. They must learn to avoid spending 100% of the fruits
of their labor. This takes education and self-discipline. It does
not come naturally.
of one generation may not persevere in the next. This is especially
true of good habits. Children who were taught to say "Yes,
sir," do not seem to have transferred this habit to the baby
boomers, who neglected teaching it to their children. My question
is this: Is thrift the equivalent of "yes, sir"?
leads us to the question of deficits: trade, federal, and personal.
Let’s consider them in reverse order.
speaking, personal deficits appear to be the least of our economic
worries. The ratio of debt
service repayment in relation to disposable personal income has
varied little over the years 1980—2003: between 13.4% to
16.2%. It’s in the high 15′s today.
indicates that individual Americans pay close attention to their
ability to repay their debts. They are not wild spendthrifts. But
what they also are not these days is wild thrifts. The personal
savings rate today is close to 0: about 0.2%.
speaking, however, personal budgetary deficits really are the heart
of our economic worries. But why is this true, if, statistically
speaking, personal debt is restrained? Because the difference between
personal thrift and personal debt is the defining mark of economic
success and economic failure, long-term. The difference individually
between a net annual deficit and a net annual surplus — a difference
at the margin — marks the United States as an emerging debtor nation.
is a debtor nation because of the mindset of its common people.
This mindset is increasingly present-oriented. It is therefore lower
class. The American middle class is steadily becoming lower class,
despite its present level of wealth.
can be debt that is future-oriented. Debt used to buy tools or education
is future-oriented, upper-class debt. But debt incurred to purchase
depreciating assets is a mark of personal capital consumption: lower
class. If, at the margin, the individual’s budget is in the red,
year after year, then he is consuming his seed corn. Because of
budgetary restraints, this consumption may be marginal annually,
but it is nonetheless part of a pattern of behavior. This pattern
of behavior is present-oriented and anti-economic growth. Multiplied
across a nation, it becomes the indicator of future impoverishment.
AND GOVERNMENT DEBT
the individual American, the U.S. government is not under much restraint
with respect to its debt. The government is unquestionably a spendthrift.
If it were not for the accounting
trick of counting Social Security’s net revenue as income, rather
than as a future liability (debt), the United States government
would not have had a single on-budget surplus year in my generation.
Nixon’s tiny surplus in 1969 was the result of Lyndon Johnson’s
recommended accounting trick regarding Social Security — taking
Social Security off-budget — which went into effect in fiscal
estimated on-budget deficit for fiscal 2005 is in the range of $520
billion. Without Social Security’s surplus of income over payments,
it would be $675 billion.
have entered an era of massive Federal deficits. The growth of the
Federal deficit is about 5% of gross domestic product. The growth
of the economy is under 4%. The deficit is growing faster than the
economy. We are in cancer mode.
There are only two ways out of cancer mode: (1) encourage more economic
growth by freeing up the economy; (2) cut government spending. Of
spending cuts, we see none. As for freeing up the economy, we also
year for the last 11 years, The Wall Street Journal and the
Heritage Foundation have published the Economic Freedom Index. This
book-long study ranks 161 nations in terms of economic freedom in
50 different areas: trade policy, fiscal policy, government intervention,
monetary policy, etc. In 2004, for the first time, the United States
did not make the top ten. It fell to #12. Dr.
Ed Fuelner, the president of Heritage, explains why.
are overtaking us. We are treading water.
recent years, the U.S. has allowed higher government spending
and protectionist measures to drag our economy into a trap. We’re
now choosing to do what is easy and shortsighted, rather than
doing the hard work needed to expand economic freedom.
as the Index shows year after year, without persistent commitment,
economic freedom fades. Luckily, it hasn’t come to that here.
economic freedom isn’t fading, it’s merely holding steady as other
nations improve. That’s why we’ve been sliding down the list of
economically free countries. This year, Iceland, Australia and
Chile all forged past us.
tax rates — especially high corporate-tax levels — are
a major drag on the U.S. economy. Increasing government spending,
now at 35.9 percent of GDP, is also a problem.
AND THE TRADE DEFICIT
trade deficit is a combined product: low-cost foreign goods and
a willingness of foreigners to invest in the United States. For
as long as foreigners are willing and able to provide the money
to buy goods offered for sale in their currencies, the trade deficit
will continue. Of course, if American consumers said, "Let’s
save," spending on foreign consumer goods would decline. But
it is likely that low-cost imported capital goods would replace
them. If foreigners can produce cheap consumer goods to export,
it is likely that they can produce low-cost capital goods, too.
Americans look for bargains, and this is even more true of capital
goods buyers than consumers. Businessmen pay close attention to
the bottom line.
if Americans started saving at rates comparable to foreigners who
invest in dollar-denominated assets, foreigners would buy fewer
assets. This would have an effect on the distribution of future
payments, Americans vs. foreigners. Americans would earn higher
incomes than if they had refused to save. Output here would rise:
more capital. American industry would grow more competitive. We
could compete better with Asian manufacturers. But it would take
an enormous increase in thrift by Americans to outbid foreigners
for ownership of capital used in domestic firms.
the trade deficit is a product of Americans who are looking for
bargains and foreigners who are looking to buy assets owned by Americans:
bargains. Americans buy consumer goods. Foreigners buy producer
goods and debt instruments. For this arrangement to change, it would
take a transformation of thinking on both sides: by foreigners,
who would decide to invest less money here, and Americans, who would
decide to invest abroad or in the U.S., thereby raising the price
of American capital assets. Americans would outbid foreign investors.
likelihood of this changing dramatically on both sides is minimal.
There are basic habits of mind already firmly ingrained. Americans
don’t like to save. Foreigners do. So, any major reduction of the
trade deficit must come from capital’s supply side, i.e., foreign
investors. They keep buying dollars, which raises the price of the
dollar, which enables Americans to buy imports less expensively.
other words, the fate of the dollar is now in the hands of foreigners:
private investors and central bankers. The initiative comes from
foreigners, who invest here. They make foreign currencies available
at today’s low but climbing prices. Americans are in full consumption
mode. They are taking to heart the demand-side economics of John
Maynard Keynes: "Spend ourselves rich."
know now that in the U.S. capital markets, Americans have decided
to forego greed — future income — for present enjoyment. The lure of
greed is now minimal in the thinking of most Americans. They are
content not to get rich.
what of fear? John Mauldin, in his January 7 letter, predicts that
fear will be the great motivator.
falling dollar will not be enough to cure the trade deficit. It
will also take a rising savings rate from the consumer. What will
bring that about? When the next recession comes in 2006 or 2007,
the stock market will drop. Average drops during a recession are
43%. The Baby Boomer generation will realize that the stock market
is not going to bail out their retirement hopes. They will stop
spending and start saving with a vengeance.
John: ever the optimist. He is always ready to draw to an inside
think the habit of thrift is so far removed from the thinking of
baby boomers that it’s not worth considering as a macroeconomic
factor. Why not? Because the boomers have so little time to prepare
for their looming retirement. The slogan, "It’s never to late
to begin," is true. But the unstated assumption — "You can
still live comfortably in retirement if you start saving now" — is
poppycock. Thirty years gone by cannot be recovered in a decade
of thrift. There is no way for high rates of thrift to make up for
three decades of "Me Decade" investing by the generation
that reached adulthood in the 1970s. They did not change in the
of us who reached adulthood before the Beatles arrived in 1964 vaguely
recognized that thrift is vital. But, after February, 1964, the
counter-culture captured the minds of America’s youth. The counter-culture
as an in-your-face phenomenon lasted only from 1964 to the recession
of 1970, but that was sufficient. The Me Decade began in 1970, and
the 70s generation did not have thrift in its agenda.
those Me Decade people are reaching the end of their careers. Why
will they change their spending habits at this late date? We have
already gone through a recession: 2001. Consumers didn’t miss a
beat. The housing market boomed. The Federal Reserve System pumped
in money to keep the consumer boom from faltering. This reconfirmed
the worldview of the Me Decade’s cohorts: “There are no significant
negative sanctions for big spenders.” The FED forced down interest
rates, which allowed households to increase their spending without
hitting the debt-repayment ceiling. They borrowed more because money
was cheaper. The FED offered the bait; the consumers bit.
Me Decade’s cohorts have always believed that, with respect to their
retirement years, something will turn up, that the government will
provide the good life, that deficits don’t matter. They are willing
to cut spending when they fear that they can’t make their monthly
payments, but this is not the same as saying that they are willing
to cut spending sufficiently to pay off their debts and not take
on new ones. On the contrary, the idea of paying off debts and becoming
net savers is so far outside the box for the Me Decade brigade that
it is not worth considering as a way to save the dollar from a continuing
what will reverse the fall? This: the individual decisions of foreign
investors to cease financing Americans’ buying spree. How do they
finance this? By their purchase of dollar-denominated assets, thereby
increasing demand for dollars. The dollar will fall when they quit
should invest in terms of this understanding. Thrift by Americans
will not reappear as if by magic during the next recession. The
dollar will fall. Americans will then of necessity buy fewer foreign-made
goods. The trade deficit will shrink. This state of affairs will
be imposed on American consumers. It will not be initiated by them.
could be a change in attitude if the benefits were high enough.
If the United States government ceased to tax profits and dividends
until the money is taken as personal income, that would increase
the domestic savings rate. But it would also increase the savings
rate of foreign buyers of dollar-denominated assets. This would
increase the value of the dollar internationally, making imported
goods cheaper. The trade deficit would continue until such time
as improved American productivity began to make itself felt in the
world’s markets or until foreign investment markets and legal systems
became competitive with America’s. This would not be an overnight
phenomenon. I think it would take well over a decade. We cannot
make up for lost investing in one decade, either personally or nationally.
possibility of a major overhaul of the tax code today is minimal.
To get rid of the corporate tax and the taxation of retained earnings
would take an ideological revolution. It’s not going to happen soon.
money would stop the fall of the dollar, but that would not necessarily
end the trade deficit. Stable money would give foreigners another
reason to invest here. The dollar would then rise. It would buy
more foreign goods. The trade deficit would increase.
writes: "A falling dollar will not be enough to cure the trade
deficit." I think to myself, "falling dollar, plus what?"
With the trade deficit for the month of November at $60 billion,
what kind of motivation would be able to reverse the trend? I can
think of none that will come from America’s side of the equation.
can think of only one American-initiated factor that might conceivably
cure the trade deficit over the next decade: the return of the commitment
to thrift by Americans — a level of commitment on a scale not seen
in my generation. Nevertheless, this commitment must not lure American
manufacturers to buy imported capital equipment. The trouble is,
it would. Americans want a bargain. America’s capital goods industries
are not sufficiently competitive.
America’s economy needs most is increased productivity. We need
to be able to compete in world markets. We need more investment,
especially in education, but not the education provided by tax-funded
bureaucrats, i.e., classroom teachers. We need education in entrepreneurship.
We need education by market-tested masters.
need a return to apprenticeship. This is not going to happen. This
country spends over $270 billion a year on education, and most of
this money goes for classroom instruction in tax-funded, tenure-governed
institutions. These institutions are well-organized politically.
They are not going to turn loose of the money tree.
you rather spend a year as an apprentice to Donald Trump or as an
apprentice to a tenured professor of marketing who has never worked
in private industry? Give me The Donald! Americans instinctively
know this. Nobody would watch The Apprentice if the mentor were
Professor Anyone. Nobody would tune in to hear Professor Anyone
say, "You flunked!"
state touts education as a cure-all. But it touts only state-funded
education. It seeks to feather its own bureaucratic nest. The result:
a soiled nest. There are too many degree-holders and not enough
entrepreneurs. There are too many lawyers and not enough engineers.
things can reverse the trade deficit: (1) vastly increased thrift
by Americans (unlikely), who will invest in companies that insist
on buying American-made capital goods; (2) a refusal of foreigners
to buy American investment assets. The first isn’t going to happen
until the dollar falls so low that American capitalists can’t afford
to buy foreign-made capital goods. I don’t know when the second
will happen. I know only that it will.
AS A TOOL OF DOMINION
debts make sense for the debtor. I just bought a 4-bedroom, 2-bath
home for $90,000. (Note: not in California.) I paid 5% down and
got a 30-year loan at 5.375%. My total mortgage payment is under
$540 a month. The home is located in the middle of a boom area with
for the Web, with its published mortgage rate sites. I will save
total payments of $17,200 over the rate quoted to me locally.
It took less than 20 minutes of toll-free phone time to get the
I foolish to borrow? Not when I can rent the home for more than
I pay to the lender. Why can I do this? Because I have an almost
flawless credit rating. Also, because lenders trust the dollar’s
evaluate a housing bubble thusly: Can I rent the home for more than
I must pay to repay the mortgage? If I can, it’s not a bubble. It’s
merely a boom. I like booms.
me, thrift is a way of life. It always has been. So, I can now borrow
cheap money. The person who spends what he earns and runs up debts
doesn’t have the credit rating to enable him to buy. He must rent.
poor schnook is going to spend my monthly mortgage payment to buy
a few groceries before it’s paid off. I’ll probably be in one of
those stately ethereal mansions, but my wife will have minimal monthly
payments to make in terms of purchasing power. She will have a roof
over her head.
invest in hard assets, such as a piece of commercial real estate
that will produce 20% per annum, probably appreciate, and let me
earn a $50,000 salary while I’m at it. (http://www.demischools.org)
is why we should teach our children to save. Saving requires budgeting.
I probably did not do a great job teaching my children most of what
I know, but this lesson they learned. They are frugal. This won’t
make them rich, but it will keep them from being poor. They may
rent today, but, at some point, they will have the ability to secure
a mortgage because of their good credit.
may have overdone it. They should borrow short-term money to buy
tools or get meaningful educations/licenses, and then pay off the
debt, fast. This way, they will build a credit history. That’s the
wisest strategy. But if there is a temptation to go into consumer
debt, then it’s best not to borrow at all. Like other addictions,
the first snort should be avoided.
is not an evil. It depends of what you are borrowing for. If your
debt supplies tools, education, or a comfortable but modest place
to live, then it’s a tool of dominion. But if debt is used to buy
depreciating assets, it is a curse. Most assets depreciate. Buy
them used for cash from someone who is strapped for cash.
of thought and behavior take years to acquire. They can be lost
in one generation. This is what happened to the ideal of thrift
in the United States. Joe Lunchbucket is dead or retired. His children
are in hock. His grandchildren want to be like their parents. Debt
is easier than thrift. As the saying goes, "Things are easier
to get into than out of."
habit of thrift for the wealthy upper 20% is still with us, although
declining, but this habit is compromised by the twin assumptions
of a stable dollar and trust in government promises. Thus, the creditors
who buy government debt think they will be repaid. It will take
a universal default to disabuse them of this confidence. That default
is coming, in one form or another.
there are more debtors who vote than creditors who vote. And the
biggest debtor on earth is the U.S. government. It won’t take anything
new to persuade Congress to run a deficit. The voters are on their
will be tens of millions of victims of government promises. There
are two varieties of victims: (1) government-trusting debtors who
never save, and (2) government-trusting creditors who do. Don’t
be in either camp.