Misunderstanding Savings Rate: Still Negative

This evening, I read Michael Brush’s column Americans Still Have Saving Grace. He argues that "Are we really dipping into our savings for the first time since the Great Depression to keep spending? Not at all."  My problem with the main premise of the column is that his argument omits or misstates several "game changing" facts that alter the dynamics of the non-wage/income data discussion. I am compelled to clarify them.

Brush states that the savings rate is not actually negative; He quotes Ed Yardeni’s claim that "the definition of "income" excludes capital gains, and this creates a huge distortion in the savings picture."

While Yardeni is technically accurate, his statement is highly misleading, and his conclusion is erroneous. Here’s why:

According to an analysis by the non-partisan Congressional Budget Office, the richest 1% of households received 57.5% of all income from capital gains, dividends, interest and rents in 2003. That was up from 38.7% in 1991.

In other words, the "excluded" non-wage income doesn’t fall to the vast majority of households. Yes, the very same population that has a negative savings rate.

Consider the math on that: 1% of the country garnered well over half of all that non-wage income. And if memory serves, its less than 10% of Households that garner over 90% of all non-wage income (I don’t have the precise stat handy). Incidentally, if you are in the top 1% of all earners in 2003, your
wages/income ranged from $237,000 to several billion dollars. Not too
shabby.

This is a classic error of confusing mean with the median. In a case where a small percentage of the sample is disproportionately weighted — as is non-wage income distribution — we end up with a mean and a median wildly diverging.

The classic example is a dozen cops or firemen in a bar having a beer. Bill Gates walks in for a quick one. While the "median" average income of all drinkers might be $50,000, the "mean" average income would be about $1 billion.

And thats why the non-income income exclusion is so irrelevant to the negative savings rate. The Cops weren’t suddenly making more money — the statistics were skewed by BillG@Microsoft.com.

As to the other comment in the column that deserves challenge — "What’s more, solid job growth and decent wage gains suggest the consumer will continue to be just fine" — let’s save that for another day . . .

>

Sources:
Americans Still Have Saving Grace
Michael Brush
RealMoney.com, 2/8/2006 1:07 PM EST
http://www.thestreet.com/p/rmoney/retail/10267249.html
 
Rich getting richer faster
MSN Money Staff, 1/30/2006
http://moneycentral.msn.com/content/invest/extra/P143548.asp

Category: Data Analysis, Economy

Out of Control Pork!

Category: Politics

Sourcing the Greenspan Chatter

This is the article that the Greenspan quote came from that popped the market today; I don’t know how accurate it is (holographic image?) but

Gold price riding high on fear of terrorism, says Greenspan
Leo Lewis, Tokyo
February 09, 2006
http://tinyurl.com/98gdp

Excerpt:

"ALAN Greenspan, who stepped
down last week as chairman of the US Federal Reserve after 18 1/2 years, has
blamed the threat of terrorism for the high gold price, in his first private
sector speech since being let off the leash of officialdom.

According to
members of his audience of international investors – watching a holographic
image in Tokyo as he spoke in New York – Greenspan said the high cost of gold
did not reflect inflation or the strength of commodities, but rather a fear
among investors of a major geopolitical conflict. There were people who believed
that a nuclear weapon could be detonated within five years, the former American
central bank supremo said.

The low probability of such an event occurring would not necessarily avert a
spike in the gold price, he added.

Greenspan went on to discuss a range of topics, including the problems
created by a lack of investment in refining capacity by the oil industry. He
said this failure by the oil majors meant that the era of cheap energy was
almost surely over.

The former Fed chairman is also said to have indulged in a moment of
self-criticism over the central bank’s failure to prevent the market bubble in
the late 1990s.

That may explain Gold’s $20 whackage yesterday, but what about all the rest of the metals and commodities?

Also, if you missed this, you MUST read it:

GREENSPAN SENDS MIXED SIGNALS IN FIRST DAY AT HOME
Former Fed Chief’s Inscrutable Statements Baffle Wife
http://www.borowitzreport.com/archive_rpt.asp?rec=1307&srch=

Its a hoot!

and on the chance the article disappears, I’ll archive it after the jump . . .

Read More

Category: Federal Reserve, Inflation, Investing

Housekeeping: Site Suggestions

Category: Weblogs

Cisco Technicals

Category: Technical Analysis

Consumer grows increasingly levered

Category: Retail

The Risk to Equities from Rising Rates

Category: Federal Reserve, Fixed Income/Interest Rates, Investing

iPod Price Cuts

Category: Music, Technology, Television

Still Short Gold . . .

Category: Commodities

Government Budget Number Crunching

I do Larry Kudlow’s show whenever he asks, and while I am certainly not the
political wonk he is, I do keep track of the budget process. I want to see how the deficit is shrinking or growing, what changes to the tax code might be coming, and which sectors of the economy are getting a spending boost from Uncle Sam.

That’s a lot of stuff to watch — Fortunately, there’s a terrific set of charts today via the online WSJ: Crunching the Numbers (click each for larger graphics).

~~~~~~~

Gainers and Losers:
 

A broader view of what’s growing and shrinking in Bush’s 2007 proposal, in budgetary authority

Infobudget06bigpic

Sources: Office of Management and Budget, AP      
*Includes miscellaneous, undistributed offsetting receipts

>
~~~~~~~~~~~~~

Receipts and Outlays
A look at how the federal government is counting on bringing in revenue, and how it plans to spend it in fiscal 2007. All figures in billions unless noted.

Infobudget06receipts

Did you know that thee Estat Tax weas such a modest slice?

~~~~~~~~~~~~~

Read More

Category: Economy, Politics