Great Depression?
Monday, February 5, 2007 | Jason JovineRating:
What happened after the stock market crash of 1929? Stocks were worth approximately 20 cents on the dollar compared to what they were worth prior to the crash. We, here in the United States, aptly called this period "the Great Depression". Over 40% of the banks in the USA failed during the Great Depression. Unemployment got up to around 30% during that period. This historic event helped lead to the election of FDR (Franklin Delano Roosevelt) and the " New Deal" which included much more government involvement to help steer the American economic ship.
There was one other thing that occurred during this Great Depression. People spent more than they made. As a matter of fact, the savings rate in 1933 was a negative 1.5%. I'm actually surprised that it wasn't even lower.
You would expect the savings rate to have been negative back then because people were hungry, and when you're hungry, you will do anything to put food in your growling belly. You will even vote for anyone who is slick enough to convince you that he or she can help eliminate your hunger pangs (e.g. Adolf Hitler.)
The savings rate has been negative for an entire year only four times throughout history. These years were 1932, 1933, 2005, and 2006. Last week, the Commerce Department announced that the savings rate was a negative 1% for 2006; this was the lowest showing since the Great Depression!
The cause
Many economists opine that this negative savings rate is primarily caused by many people feeling "richer". The runup in housing and then stock prices have made many folks feel less concerned about the future, and this feeling has led them to spend like drunken sailors.
For those who don't know, the personal savings rate is calculated by taking the amount of income left after taxes are paid and subtracting what you spend from that. Whatever is left over is savings or a lack thereof.
Another theory that others out there propose is that people spend more than they make because everyone wants to "be like the Joneses down the street", so to speak. In other words, many people feel that they have to have as nice a house or a car as their friend or neighbor.
Before I go any further, I want to share one of my favorite quotes. "Life is the endless pursuit of ceaseless desires." That said, I hope that this is not you. In other words, don't try to be like the Joneses down the street. You were dealt a different hand in life than they were. Life is not a level playing field, so don't be so hard on yourself for not having what someone down the street has. Be thankful for what you do have.
My turn
I want to say that I partially agree with the two theories that I previously mentioned, but the one that I believe in more is that over time, businesses have been able to slowly and steadily pass more and more of their expenses/costs on to the American worker, and our salaries are not enough to live in this "Capitalism Gone Wild...." culture that we are in.
These increased costs have forced us to borrow and put ourselves more and more into debt. Healthcare and education costs, just to name a few, have been increasing MUCH faster than inflation has.
Workers are now spending on average $1,094 more in healthcare for their families than they did in 2000. Since 2000, employment- based health insurance premiums have increased 87%, compared to cumulative inflation of 18% and cumulative wage growth of 20% during the same period.
In one of my articles a couple of weeks back called "Capitalism Gone Wild", I spoke about how we are even asked for money when we go to some bathrooms, now. We can't even go to the bathroom in peace, anymore. You are charged a $1-$2 fee if you go to a bank that isn't yours. A gratuity is now built into your check when you go out to eat. I know some of you remember the good old days when you gave a tip for a "job well done".
The consequences
The true cause of this negative savings rate is that capitalism has gone wild. In the short term, I am sure that this won't get the attention that it deserves. But in the long term, remember this: how much the US as a society saves now determines how much we will have in the future.
Savings and investment give us the money that we need to invest in research of new and cutting edge technologies for the future, as well as many other things that I don't have time to discuss here right now.
We have almost 80 million babyboomers who are starting to retire and will need to lean on their savings. I see retirees at Walmart all the time. They are working, sometimes in their 70's, because they didn't SAVE earlier in life.
In the next several decades, will we see another Great Depression?
Until the next time, folks, spend your hard-earned money wisely.
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Jason Jovine
Contributing Editor
The Tycoon Report
MARK YOUR ECONOMIC CALENDAR – What’s ahead for the week of February 5th.
Monday, February 5th, 2007
10:00 ISM Services: Consensus 57.0
Big Picture:
Category Jan Dec Nov Oct Sep
Total Index 56.0E 56.7 58.3 57.4 54.6
New Orders 55.6 56.2 55.8 57.5
Employment 53.2 51.9 51.8 53.3
Deliveries (nsa) 51.0 50.0 54.5 54.0
Inventories (nsa) 53.5 51.5 53.0 50.5
Exports (nsa) 61.5 58.5 63.5 59.0
Imports (nsa) 62.0 59.5 57.5 55.0
Prices Paid 59.7 59.1 52.6 58.2
Wednesday, February 7th, 2007
8:30 Productivity-Prel: Consensus 1.3%
Big Picture: Cyclical productivity growth has softened with the slower pace of output growth. Sharp downward revisions in compensation have largely erased the inflation risk from the labor markets as unit labor costs stand at just 2.9% yoy. Unit labor costs are a key indicator for wage-based inflation. The big picture is that trend productivity growth plus trend labor force growth equals potential GDP growth -- what some call the economy's longer term speed limit. Labor force growth runs near 1% annually. If structural productivity growth is 2%, potential GDP growth is 3%. Over the long term, strong productivity growth is a win/win situation resulting in weak unit labor costs and the stronger wage growth allowed through the increased output produced. Strong productiivty comes with a cost to near term employment (labor) demand and benefits in lower inflationary pressures and a higher standard of living.
15:00 Consumer Credit: Consensus $6.0B
Big Picture: Tax cuts and cash out mortgage refinancing provided consumer funding in past years as 6% yoy income growth now provides the means outside of credit. Credit cards (revolving credit) make up 36% of total consumer credit which stands at $2.4 trillion. Nonrevolving credit helps finance auto purchases, tuition (including Sallie Mae), vacations and other forms of consumer spending. Annual growth of 4.3% at the low end of the 3% - 14% yoy growth range over the last 10 years.
Thursday, February 8th, 2007
8:30 Initial Claims: Consensus NA
Big Picture: Initial claims broke above the remarkably tight range held in the 4-week average (306K-318K) over the holiday period as the new year brings the lowest 4-week average in a year. Continued claims showed a five year low in the 4-week average in mid May and now stand 84K higher. The continued low levels reflect the thin available labor supply which make a qualified hire difficult to find and less likely to be let go. A good read on the labor market as net hiring runs at a slow/moderate pace.
10:00 Wholesale Inventories: Consensus 0.6%
Big Picture: Wholesaler inventories growth of 11% yoy compares to 8% yoy growth in sales. The inventory to sales ratio bottomed at 1.15 month in May through July as weaker sales growth in recent months have left a lift to 1.20 months. Longer term trends reflect some comfort at those I/S lows as technology allows for continued improvement in just-in-time inventory management. The smaller inventory swings from rebuilding and draw downs leaves a steadier pace of domestic growth.
(Source: www.Briefing.com)
