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A National Failure to Save & Invest - Crash Course Chapter 16

Compounding the challenge of Too Much Debt
Friday, October 3, 2014, 6:08 PM

Chapter 16 of the Crash Course is now publicly available and ready for watching below.

As detailed in earlier chapters, the US' debts and unfunded liabilities far exceed its assets. But making matters worse, the country is suffering from a prolonged failure to save and invest -- both at the personal and national level.

Being over-indebted and under-capitalized is a recipe for hardship as we move into the future, especially if economic growth is going to be harder to come by (which we forecast in the upcoming chapters on net energy). Each year we continue this deficit makes us less able to withstand systemic shocks (a 2008-style financial crisis, an energy shock, the outbreak of war), some number of which lie undoubtedly ahead at some point.

How did we get to this point? Do we really want to pass these problems along to future generations? Questions like these should be front and center in the national debate, but sadly, are not. We need to work to change that -- and in the interim, lead by example at the individual level. 

For the best viewing experience, watch the above video in hi-definition (HD) and in expanded screen mode

Coming next Friday: Chapter 17: Bubbles

For those who simply don't want to wait until the end of the year to view the entire new series, you can indulge your binge-watching craving by enrolling to PeakProsperity.com. The entire full new series, all 27 chapters of it, is available -- now-- to our enrolled users.

The full suite of chapters in this new Crash Course series can be found at www.peakprosperity.com/crashcourse

And for those who have yet to view it, be sure to watch the 'Accelerated' Crash Course -- the under-1-hour condensation of the new 4.5-hour series. It's a great vehicle for introducing new eyes to this material.

Transcript: 

In prior chapters, we saw that debts and liabilities far exceed assets in the United States.

But it goes one step further than that, because we've also failed to save or invest at anywhere close to the levels that are associated with prior periods of national prosperity. 

In this chapter I will present evidence that the United States has failed to save money at virtually every level of society and make the claim that investment in national infrastructure is woefully deficient. 

My position is that the next twenty years are going to be completely unlike the last twenty years and to support this statement I am going to take you through six key areas of data: Debt, Savings, Assets, Demographics, Peak Oil, and Climate Change.  Any one of these could prove economically challenging, but the combination of two or more simultaneously, well, could prove to be more than we can afford.

This is a chart of the personal savings rate stretching back to 1959.  The personal savings rate is the difference between income and expenditures for all US citizens expressed as a percentage.  So a number like “10%” indicates that for every dollar earned, 10 cents was saved, not spent. 

Note that the long-term historical average for US citizens between 1959 and 1985 was 9.2%.   For comparison in Europe that number is around % and in china a stunning 30% of income is saved. 

Savings are important to us individually because they form the cash cushion that gets us through economic difficulties and at the national level because savings are essential to the formation of investment capital; that is, the property, plant and equipment that create actual future wealth.

In fact, true investment capital can only come from savings, not freshly printed money from the central bank - which is a very important point to make. 

You may have read or heard recently that the personal savings rate has plunged to historic lows to levels last associated with the Great Depression.   In fact, the personal savings rate has steadily declined from 1985 to present indicating that those headlines we just saw were not some very recent blip on the radar, but rather the culmination of a multi-decade erosion of savings as a cultural attribute of US citizens.   

However, we are not a nation of averages – and this chart somewhat obscures the fact that the extremely wealthy are saving incredible amounts of money, while at the lower ends the savings rate is deeply negative.

What else can we note about this chart?  For starters, a persistently declining savings tells us that there is an implicit assumption by the majority that credit will be available in the future and that we have largely substituted a “save and spend” mentality with a “buy it now on credit” mentality.  As we look at this chart we might also note that the savings rate began its decline right around 1985.

Hmmmm….Wait a minute…didn’t we see that same time frame in the section on debt? Yes, yes we did.   While this chart is showing ALL debt across all sectors, and the prior chart was of personal savings only, we can note that our national tolerance of debt shifted drastically upwards beginning in 1985 right as our national approach to savings was beginning its long decline towards zero.

In order to believe that the future is going to be bigger, shinier and brighter than the present, you have to believe that low savings and high debts are a path to prosperity, or at least a perpetual feature of our future economic landscape.  I am skeptical, to say the least because this just doesn’t make sense to me – it violates several laws of nature.

So the personal savings rate is low, and that's worrisome again because it means that many individuals have a very thin safety cushion to ride out any economic hardship that might come along.

But as we saw in the prior section on assets and liabilities, corporations, municipalities and the federal government have not been saving either. 

So it's really a nationwide phenomenon.

Saving and investment go hand in hand and according to the American Society of Civil Engineers we’ve fallen short when it comes to investing in our national infrastructure.  In 2005 they assessed the condition of 12 categories of infrastructure, including bridges, roadways, drinking water systems, and wastewater treatment plants.  They gave the US an overall grade of “D” and calculated that $1.6 trillion dollars would be needed over the next 5 years to bring us back up to first world standards.  Since that was in 2005 and inflation for things made out of metal and asphalt has advanced enormously since then, let’s just round this up to an even $2 trillion.

The US is now far behind most other countries when it comes to such things as high quality cell phone and internet service, and there are almost daily reminders that the municipal water pipes are badly in need of repair.

Bridges are crumbling and the electrical grid is far behind modern standards in most regions.

Despite all this, and the stated need to boost the economy, the US government in 2012 spent the lowest amount as a percent of GDP on such things as schools, hospitals, and utilities in any year since this chart began in 1970:

The same is true for all other forms of investment, excluding residential, which tagged an abysmal 0.6% of GDP in 2009, and still remains below 2% in 2013.

And putting it all together we find that a personal failure to save is reflected by a state and local failure to save, which are mirrored by a corporate failure to save, all dwarfed by a failure to save at the federal government level.  And capping it all off is a profound failure to invest.  All of these deficits lie before us and lead me to conclude that we might as well not worry about them because they simply cannot all be paid.  But at the same time we should also adjust our expectations accordingly. 

This is our legacy – the economic and physical world that we are choosing to leave to those who follow us and most of these bills will come due, in a big way, in the twenty teens. 

How did we get here?  How did this happen?  As a former consultant to Fortune 500 companies, I saw an explanation for this and it all begins at the top.  If the leadership of a company was financially reckless or had a moral disregard for its workers, then this same behavior could be found reflected throughout all the layers of the company. 

Our government has pursued a reckless policy of debt accumulation while neglecting saving and investing and so have states, municipalities, corporations and private citizens. 

David Walker, former comptroller of the US once said that “The US Government faces deficits in … its leadership”.  

The top sets the tone. 

This topic should be front and center in every political debate but it is usually nowhere to be found. A failure to invest and a failure to save will inevitably lead to a future that is less prosperous, something we all instinctively know is true.  And yet nearly all efforts by the central bank and politicians are centered on boosting current consumption while ignoring savings and investment. 

Again, we can note the trend and until and unless it reverses, all we can do is adjust our expectations downwards and prepare for a future of less and less.

Please join me for the next chapter of the Crash Course, on Bubbles.

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5 Comments

climber99's picture
climber99
Status: Silver Member (Offline)
Joined: Mar 12 2013
Posts: 188
Debt will always exceed savings because ...

Been thinking about the issue this morning and came up with:

Debt = Saving + existing assets  + resources and energy yet to be extracted

Therefore debt will always exceed savings and existing assets .  The difference is used to finance resource and energy extraction (which get converted into goods(assets) and services that we use).

Please feel free to pick holes in my reasoning. I'm still developing it.

Ed

climber99's picture
climber99
Status: Silver Member (Offline)
Joined: Mar 12 2013
Posts: 188
No one has commented on my

No one has commented on my comment so I'll elaborate more.

95% or so of the money in circulation (money supply) in loaned into existence. This is where our total outstanding debt comes from.  Once in circulation this money can be used in either one of two ways: to a) buy goods, services and energy or b) saved.

So debt = existing assets + savings

However this is not the case, as was demonstrated in the video. So what have we not taken into account?

Answer: resources are being mined and we are adding energy to the system  (enabling world GDP to grow). The money supply must expand at the same pace or we get inflation/deflation. To expand the money supply, more money must be loaned into existence than money already in existence .

Hence debt > existing assets + savings   

Putting this all together, I arrived at

debt = existing assets + savings + (some of the) resources and energy yet to be extracted

Ed

ps. Maybe we have over estimated the resources and energy yet to be extracted !!!   I think this is the crux of the problem to which Chris is alluding to.

 

 

New_Life's picture
New_Life
Status: Gold Member (Offline)
Joined: Apr 18 2011
Posts: 395
climber99 wrote: No one has
climber99 wrote:

No one has commented on my comment so I'll elaborate more.

95% or so of the money in circulation (money supply) in loaned into existence. This is where our total outstanding debt comes from.  Once in circulation this money can be used in either one of two ways: to a) buy goods, services and energy or b) saved.

So debt = existing assets + savings

However this is not the case, as was demonstrated in the video. So what have we not taken into account?

Answer: resources are being mined and we are adding energy to the system  (enabling world GDP to grow). The money supply must expand at the same pace or we get inflation/deflation. To expand the money supply, more money must be loaned into existence than money already in existence .

Hence debt > existing assets + savings   

Putting this all together, I arrived at

debt = existing assets + savings + (some of the) resources and energy yet to be extracted

Ed

ps. Maybe we have over estimated the resources and energy yet to be extracted !!!   I think this is the crux of the problem to which Chris is alluding to.

 

 

Gov debt >>> existing assets + savings + resources (worth extracting)

Put simply in realistic terms, these massive debts will never be paid off, to me that's obvious.

Luke Moffat's picture
Luke Moffat
Status: Gold Member (Offline)
Joined: Jan 25 2014
Posts: 384
Numbers

I don't understand the 'resources and energy to be extracted' part of the equation. How is this quantifiable?

climber99's picture
climber99
Status: Silver Member (Offline)
Joined: Mar 12 2013
Posts: 188
I'll illustrate by way of an

I'll illustrate by way of an example. 

Lets say you borrow to buy a home 40 miles from where you work. One assumption made by you and the bank is that the fuel for your vehicle will continue to be available and affordable.  Maybe you work in construction, in a factory or in sales. Another assessment on future "resources and energy to be extracted" must be made to assess how secure your job is. Without resources and energy, buildings don't get built, things don't get made and therefore there is nothing to sell. You don't get paid.

If your assessment of future resources and energy is correct then you end up paying back your debt with interest and end up with an asset (your home) and some savings. In effect, some resources and energy have been converted into assets and savings. In doing so you have contributed to GDP.

If your and the bank's assessment is wrong and you can no longer afford to live in your home because you loose you job or go part-time then you may have to sell your home to pay back your debt and any shortfall made up with your savings. If there is still a shortfall then you default on some of your debt.  The bank picks up the tab.  However if too many are in your position and default, then the banks may not have enough reserves to cover it. In this case, the government must step in and refinance the bank with tax payers money.

Just one example.

In summary. We are always assessing future resource and energy extraction rates, even though we may not realize it.  Debt is issued depending on existing assets and savings held AND on an assessment on future resource and energy extraction rates.

Ed

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