Hello,
there is one thing that I think is important enough to emphasise, in
relation with our analysis and what is believed elsewhere.
It is about the saving rate, and whether the private sector balance is
sustainable or not.
Quoting Jim Devine:
"It's not US _savings_ (i.e., assets) that are "non-existent." Rather, it's
US _saving_ (net addition to savings) that is negative. Overall US consumer
net worth is _positive_, not negative (even though this net worth did fall
during the last year)."
There seems to be a problem in the way the above was expressed (or perhaps I
do not understand the definitions used: saving and savingS).
Anyway, saving is a flow, assets are stocks. And, not only in the US, but
generally, the NET WORTH of the household sector (which includes physical
and financial net assets) is positive, and it can be 2, 3, 4, 5 times the
level of income. The latest figure for the net worth of the Personal Sector
in the US (39.999 Bn.) is almost four times the GDP (circa 10.000Bn.) and
more than five times the disposable income of the private sector (circa
7.000 Bn). No one would dispute that net worth of consumers is positive.
So, I guess that what is implied by Jim is that household (or consumer)'s
saving, INCLUDING CAPITAL GAINS , is POSITIVE, and therefore there is not
'really a problem' with the private sector. Perhaps this is not what Jim
implied, but we know that this is a major argument that is going around for
some time now.
We disagree. We elaborated on this in the paper, which I would very much
like you to download or read from the web site (www.levy.org). You could get
it directly by using http://www.levy.org/docs/sreport/implos.html
Let me try to make the points as concise as I can (but please, try to get
hold of the original document anyway):
1) in the framework of our analysis our major concern is with the *financial
imbalance* (expenditure, including investment, minus income gross of capital
consumption) of the *private-sector* (the aggregate of the private sector,
including households, unincorporated firms and corporations) . The gap,
which is large as it was never before (above 6% of GDP) cannot be sustained
at the present rate, *because* it can only be financed by credit or by
foreign purchase of equities. It is not possible to 'spend' the wealth (or
capital gains, for that matter). There must be either additional credit (net
borrowing) or net realization of assets by the sector as a whole.
2) By disaggregating the private sector between household (or the personal
sector) and corporations we find the additional problem that households'
realization of equities (to allow spending beyond income but without relying
solely on debt) has largely depended on the fact that corporations have been
net purchasers of equities. As corporations have been in financial deficit,
they could not have purchased equities at the same rate without recurring to
more credit; therefore setting another limit to the ability of households to
realize its wealth.
3) The limit to borrow, in our opinion the binding constraint in the last
resort, is set by the ratio of debts to *income*, because debts must be
serviced by cash. The household sector *as a whole* cannot realize more than
a fraction of its assets without causing the market to crash. The limit to
borrow is not set by the ratio of debt to income plus capital gains; such a
limit would be extremely vulnerable to a fall in prices. Moreover, we
actually estimated the ratio of saving, inclusive of capital gains (i.e.
change in net worth), relative to income inclusive of capital gains. Such a
ratio plunged from 44.4% in 1999 to *MINUS* 17.4% in 2000, and it remained
strongly negative in the first quarter of 2001.
re re re re re regards,
alex
