Thursday, February 08, 2007
Bubbleheaded thinking at the Wall Street Journal
As a statistic, however, the official "savings rate" is nearly as useless a guide to prosperity as the trade deficit. In the government accounts, what is called the savings rate is literally income less consumption. But the government defines income too narrowly and consumption broadly. For example, "income" doesn't measure capital gains (whether realized or not), the rising value of your home, or even increases in your retirement accounts.
That's right, your unrealized gains on Yahoo in 2000 was savings just like your unrealized gain on your condominium in Miami is savings. Another definition I learned was Investment and there was a reason that Savings and Investments were not considered to be the same thing and that has to do with risk. It is the bubbles we have lived through that makes outsized returns on investment seem to be as riskless as a Treasury note.
Think about how you calculate your own personal "savings rate." Do you merely add up what you make in salary in a year minus what you spend? Or do you sneak a peak at whether your IRA increased in value, or check the sale price your neighbor got on his home to figure out what you might be able to get for yours? By any normal definition, "savings" should include your increase in total assets--in other words, your gains in overall wealth.
But you don't consider the appreciation in the value of your home as savings for a very good reason. The value of your home could depreciate and you have no intention of cashing in the equity in your home. At least you shouldn't unless you have a very good reason. Savings should be a very stable amount of money that you have put aside in an interest bearing account for use during a rainy day. In the past, economists distinguished between investments, whose value was volatile, and savings. It takes a very long bull market to make people forget that counting your stock market gains as money in the bank is foolish. I take this article as another sign that people have forgotten the lesson of 2000, if it was ever really learned.