In his previous post, “On the Fourth,” EMR suggested using the metric, “U.S. Net National Savings as a Percentage of GDP,” as an indicator of the extent to which U.S. society is preparing for the future. Why is savings so important? As EMR often says, the benefits of civilization are expensive. We have three choices: (1) Save the capital ourselves to pay for those benefits, (2) borrow the capital from foreigners, or (3) live without the benefits.
Since the 1980s, the U.S. has chosen Option 2. We can continue borrowing until our level of indebtedness gets so high that foreigners stop lending to us. It is the thesis of “Boomergeddon” that such a day will come, probably some 15 to 20 years from now (although with each passing month I am tempted to advance the date by several years).
To grasp our sad state of affairs, view the chart (based on OECD data) at the top of this post. That compares the household savings rate (excluding business and government) of the U.S. to that of other nations in the 2006-2007 time frame. Our consumers then were among the most profligate in the world. Since then, the household savings rate has ticked back up to between 3% and 6%, still a fraction of what it will take to pay for all the things that need paying for.
The good news is that between higher savings and defaults consumers have reduced their liabilities significantly since the Global Financial Crisis, although they still have a long way to go before the household debt/income ratio return to rates prevailing in the early 1980s, as shown in the chart above (based on Federal Reserve Bank data).We can be grateful that consumers are not actively mortgaging the nation’s future. But consumer reluctance to spend does create a short-term problem in an economy in which consumer spending accounts for 70% of all economic activity.
On the positive side, U.S. business is piling up large sums of cash — the most since the 1970s. (This chart comes from the PIMCO Group website.) On the positive side, U.S. business is strengthening its balance sheets. On the flip side, this helps explain why the rate of job creation is so low. Businesses would rather hang on to their cash than invest in growth. Unfortunately, slower economic growth = lower tax revenues = higher deficits = higher national debt.
As we all know, the big deficit spender in recent years has been government, especially the federal government. We can argue all day long as to whether deficit spending is needed to spur economic recovery, but the fact remains that the spending is occurring and the deficits are mounting, bringing Boomergeddon — the day the government cannot borrow any longer in public markets — that much closer.
One last chart. When it comes to total indebtedness, the U.S. is not the most profligate of all advanced nations. As can be seen from chart at left published in the Economist (based on data published by the McKinsey consulting firm), that distinction belongs to Japan.
Unlike the U.S., however, Japan, Britain, France, Italy and Germany have resolved to shrink their deficits. Whether they will succeed in doing so remains an open question. But having peered into the abyss of sovereign default, the major European countries apparently have made the decision to suffer the pain of a potential double-dip recession today than the conflagration of a meltdown in sovereign debt a decade from now.
So, how does this tie in to EMR’s discussion of environmental sustainability? It will take mucho dinero to make the transition from our current energy-intensive, natural capital-depleting economy to an economy that is environmentally sustainable. As EMR frequently observes, the window of opportunity to develop efficient human settlement patterns at reasonable expense closed back in the 1980s. It will be far more costly to do so now, even if we were committed to doing so, which we are not.
Right now, Americans are still enjoying the benefits of a global capital glut, but that inexpensive capital will disappear as the world’s largest economies shift from being net savers to net consumers of capital and as governments commandeer an ever increasing share of that limited supply of capital to cover their deficit spending. In another 15 to 20 years, the window will slam shut — with plywood boarding bolted on, to boot — on any hope of redeveloping our human settlement patterns in more efficient configurations.
Boomergeddon is going to be a real bummer.
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