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

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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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