I am curious how laid off workers are coping in this recession given how little money they have saved? This recession is unprecedented as it was characterized by an explosion of consumption and materialism fueled with a naive belief things would just keep going up. Consider how in 2005 the US savings rate was NEGATIVE 0.5%, the lowest it had been since 1933. People spent money on big-ticket items and Mcmansions.
Now how are these people going to cope with unemployment, no savings, and huge debt? Has this trio ever been seen before in US history? My guess is these people will be financially ruined for 10-20 years.. There is no overnight solution to this problem.. I wonder what kind of problems this is going to spur for society..
What percent of the population is affected in the manners you describe? Perhaps 5 to 10% is my guess.
Yours are difficult questions to answer. The government definition of "savings" is a macro- measure (as I recall) that does not include such things as stocks or mutual funds. But clearly, many people have lost money, many lost a lot of retirement savings. That's more than 10%, I would guess. This will have a down effect on the economy, and will probably push up government deficits. How the recovery takes shape, and how much is recovered, will moderate both effects.
One place to keep track of what's happening at the consumer unit level is the Bureau of Labor Statistics website.
The savings rate does not include the APPRECIATION in asset values as part of your income. But when you cash out the appreciated asset and spend it it counts as spending. But that is actually perfectly reasonable. The money you got to spend didn't materialize out of thin air. It was either counted in someone else's savings, if they bought the asset from you by deferring consumption themselves, or from someone else's borrowing, in which case it was not counted either as income or saving. But you spent the money that the other person borrowed, so it all comes out in the wash. Across all consumers we spend money we didn't earn by producing anything of value.
The people who were telling us that the savings rate was misleading, and that we didn't need to worry about it were idiots or charlatans. This should be obvious by now. The only way you can have (globally speaking) higher and higher asset values is by someone using their current income to buy the assets at higher and higher prices.
As a country we borrowed huge amounts of money from the Chinese and primary goods producing countries (oil, minerals and metals), and no matter how you pass this throught the asset/liability traps, we spent it all. Collectively we were spending more than we earned, and deceiving ourselved that it was okay, because we borrowed even more money to bid up prices on assets that we owned (houses and stocks).
Take a simple example. Two people have houses they just bought for
200k each, and owe 150k. They sell them to each other for 250k each, and still owe 150k. They each have no more more money than they had before nor better houses. But everyone on the block now thinks they have made 50k, and goes out and borrow and spend it. Worse, other people see that house prices are going up, and accelerate their decisions to buy houses, driving up prices even higher. Everyone feels richer and spends even more. Pretty soon everyone has a 500k house, and a mortgage that is 75% of their income. Don't look down, say the financial mavens, and you will be okay. The first person looks down, decides to bail out before the crash, and the crash starts. Everyone now has a 200k house and owes 450k on it, because they spent the appreciation on the way up. Or they depleted their other savings because they thought they could retire by selling their house instead of saving in their IRAs or 401ks.
In a macro-economic sense, the damage was done before the asset values crashed. When you consume more than you produce, you must be either borrowing or drawing down on your assets. It's plain arithmetic. The asset markets just obscured this for a while.
On Mar 9, 4:07 pm, snipped-for-privacy@mynonsense.net wrote: Consider
Actually a lot of people spent money on food and gas which went up in price a lot (2003 to 2007) during a time when wages for a lot of the population did not increase. They did not reduce their total spending in part because the had access to easy credit and because of the wealth effect of rising real estate prices.
So it wasn't just big ticket items. Even the lower-middle classes rushed to buy houses because they feared they would forever be priced out of the market. And the ones who already owned houses either actually cashed out, or at least let their savings rates fall because the felt their home price appreciation was making up for it.
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