US households to save like Indians?

May 31, 2010

Baltimore, Maryland

It's the de-leveraging, stupid!

It's a holiday in America. But there's reckoning to do. So, we're on the job as usual.

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As predicted in this space, Americans have gone back to saving.

You'll find that household spending increased earlier this year despite flat or falling income. Top economic pundits hallucinated that the correction was over. They said the private sector was not de-leveraging after all. Instead, households were going back to their own spendthrift habits.

But it couldn't last. Because households 1) don't have any money and 2) don't have anything to borrow against. Unless there's a surprise boom in real estate, households will have to get back on the wagon. They need to de-leverage. And they know it.

The latest from Bloomberg:

U.S. Economy: Spending Pauses as Households Rebuild Savings

May 28 (Bloomberg) -- Consumer spending paused in April after growing in the first quarter at the fastest pace in three years as Americans used gains in wages to rebuild savings.

The savings rate climbed to 3.6 percent last month, the highest level since January, from 3.1 percent in March as incomes increased and purchases cooled.

What happens when households pay down debt rather than borrow more? Business sales and profits go down. The economy slows. Corporate stocks are worth less than they were least, those that make their living selling stuff to domestic households, which is most of them.

Makes sense too. Households had been fattening business profits by buying things they didn't need with money they didn't have. Now, they're doing the opposite. Business profits are going down because households are not buying stuff - even when they have the money to buy it.

What did they expect? You can't spend more than you make forever.

But what's all this bellyaching about? Saving money is a good thing. It makes you richer. And it gives the economy the capital it needs to build new things. In China, for example, they've got a train that goes more than 400 kilometers an hour. At least, that's what they tell us. China can build things like that because it has savings. (Among other things...) America can't do it. It doesn't have the money.

It's tapped out. Up to its neck in debt. And trying to fight the correction by going in deeper.

By the way, you don't get real economic growth by passing money around. Transfer payments reduce growth rates. You get growth by letting people earn money, keep it, and invest it.

India's savings rate has moved up recently - to 40%!

China's too.

And the US? Well...3.6% is not going to set the world on fire. But at least it is positive!

And if you think people are bellyaching now...just waiting until savings rates get back up to 10%! That will be equivalent to taking 7% of GDP out of the consumer economy.

Meanwhile, de-leveraging is beginning in the public sector too. Well, on the whole, governments are still adding debt. But at least they're talking about de-leveraging.

Stocks fell on Friday, with the Dow down more than 100 points. Why? The papers reported that investors were worried about Europe. The rating agencies were taking a look at Spain's debt; they are going to downgrade it. At least, that was the story. Meanwhile, there was a rumor that China was going to stop doing business in euros.

The China rumor turned out to be totally unfounded. As for Spain's debt, again, what else would you expect?

Let's see, Spain owes a lot of money all over town. It falls on hard times - with 20% unemployment - so its revenues go down. Hmm.... it's going to have trouble. It will have to make deep budget cuts in order to reassure lenders.

But that is what is happening...or should happen... everywhere. Debt is like chocolate sundaes... One is a treat. Two are a challenge. Three are a menace. Four will make you sick. (More below...)

Throughout the developed world, countries are still adding to their debt. But the Europeans are beginning to push back from the table. At least, they are pretending to have had enough:

"No...I couldn't possibly...oh....well...maybe just a bite..."

Practically every one of them has promised to begin a new diet. After the holidays!

*** Back in the USA, it's still fat city. Thanks to fear of European debt, the waiters are bringing the sundaes to the US.

And here's our own Number One ice cream salesman - Tim Geithner - in Europe. He was in Berlin on Thursday. What flavor was he pushing onto the Germans? Tutti Frutti!

He told the Germans that the US was "totally behind a cooperative, worldwide approach."

In other words, instead of letting bad debt go bad on a case by case it should...the idea is to put it all together...get the whole world in on then the whole world's credit will go bad!

But make no mistake. As the quantity of debt increases, the quality of the credits falls. It doesn't matter if you spread it out...or concentrate it...or put it off...or put on a fruit topping. You eat too much of this rich dessert and you're going to throw up.

Europe is reluctantly still adding debt... America is eagerly adding debt. And all the debt is becoming less effective and less valuable. Sooner or later, lenders will cut off the ice cream sundaes to all of them....

Yes, dear reader, this Great Correction has a long way to go and a lot of work to do. But at least it is underway... Now that we see the savings rate move up again, there's not much doubt left.

There is no recovery...and no going back to the bad habits of the Bubble Epoch...

So forget the bailouts, boondoggles, and transfer payments... Pay no attention to Wall Street or Tim Geithner. Don't bother to listen to CNBC...

You already know what is going on.

It's the de-leveraging, stupid!

*** We spent last week in Europe - on various training programs.

In the evening, we drank...we played music...and shot some pool. One of the games proposed by our Irish colleagues was diabolical. They put glasses of "eau de vie" - a powerful, distilled alcohol - on the pool table. The idea was to sink a ball, without touching the glasses. If you touched a glass, you had to drink the alcohol.

We are not very good at pool. But at least we are pretty good a drinking. After a while, we were having such a good time we can barely recall what happened.

As we vaguely remember it, we exchanged a line of talk with one of them:

John: Bill, you were in Waterford (Ireland) recently, weren't you?

Bill: Yes...

John: Don't you remember? We were sitting together at Henry Downs' place? Drinking his liquor. The number 9...the best whisky made anywhere in the world. Goes down so smooth

Well, you remember, we were sitting there looking out onto the street. And you remember there's a brothel on the other side of the road...

Bill: No, I don't remember that part...

John: Sure you do... It's that Number 9...must have gone to your head... Well.... You know...we were sitting there looking across the street at the brothel... when we saw the protestant pastor go in...Very sad...a man like that...sinking into sin....

Bill: You're making this up...

John: I am not. It happened just this way and no other way. And that wasn't the end of it...then we saw the rabbi, with his little round cap... He went in too... Can you imagine it? A man like that...a man who's supposed to be a model and an inspiration...sinking into sin...very sad...

Bill: Is that all there is to the story?

John: No, it is not.

Bill: I didn't think so.

John: And then, we saw Father O'Leary...dear man...a good man...our local parish priest... And he went in too. Very of the girls must have been sick...

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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