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Debt and savings fuzzy logic



June 26, 2009 – Comments (6)

Market ticker has a post about how government records debt reduction as savings.  If so, that would help to explain all those graphs showing an enormous savings rate...

Personally, I always considered my own debt reduction as a form of savings, indeed, given that rates on debt are generally higher then savings accounts I considered it an enormously better form of "savings."

Market ticker has stated:

"Saving", by the way, includes debt paydowns; the government in its "infinite wisdom" computes the "savings rate" as "income less spending", which is not actually correct; money that goes from income to paying down debt isn't "saved".  This increase shows that consumers continue to reduce borrowing activity (out of both choice and necessity) and are desperately trying to tread water in their sea of debt (never mind the occasional shark that comes by for a snack!)

Although  for my own personal finances I consider debt reduction as a form of savings, I'd have to agree that it is wrong for government to classify the number like this.  How the heck are foreclosures and restructured loans fitting into these numbers?

Market ticker has some more comments on this stuff.

6 Comments – Post Your Own

#1) On June 26, 2009 at 10:23 AM, outoffocus (22.87) wrote:

I agree with the commentary.  I have this debate all the time with a colleague of mine who believes that the way out of this economic downturn is for people to spend.  My counter argument is how are people going to spend when theres nothing left for them to spend?.  I told him that people aren't because they have to stop spending, not because they want to. You can't squeeze blood from a rock.  

I also mentioned there will never become a point where people will stop spending all together.  We all still need food, gas, shelter, and clothing.  I also mentioned that if anything we need to get other countries to start spending here.

Over the last 2 decades we have transferred so much of our capital overseas that we need to find a way to bring it back here. 

My last argument to him is if people continue to save then we accumulate more capital for investment.  As a result we can invest our way out of this downturn rather than spend our way out.

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#2) On June 26, 2009 at 10:51 AM, Entrepreneur58 (37.78) wrote:

The calculation of savings is full of holes for sure.  The bottom line, though, is that if you spend more than you make, you are a net borrower and if you spend less than you make, you are a net saver. 

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#3) On June 26, 2009 at 12:08 PM, ByrneShill (82.84) wrote:

This is merely a semantic discussion. Given the choice of either paying down your mortgage or getting a bond for the same amount, one would count as debt reduction, the other as saving. But if the bond is in fact a MBS used by the bank to lend you your own money, you end up being indirectly your own creditor, and you could theoretically(sp?) cancel the debt you owe yourself, it doesn't really make a difference.

So in the end I think the governments definition of savings is better than Market ticker's. But that's just my 2¢.

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#4) On June 26, 2009 at 3:24 PM, AdirondackFund (< 20) wrote:

There's a lot of that going on these days.  I bought something with my debit card and my Bank double debited my cash account saying "the merchant put a hold on the transaction".  Which means, the merchants holds $100 and then charges you $100 for a sum total of $200 cash debit OUT of my account.  This has been going on for some time and I can't imagine how this one "legality'" could possibly be allowed.  Certainly no one should be expecting Retails Sales to increase EVER if this is how transactions are handled. 

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#5) On June 26, 2009 at 11:41 PM, portefeuille (98.91) wrote:

Over the last 2 decades we have transferred so much of our capital overseas that we need to find a way to bring it back here. 

Was it not rather the other way around. The U.S. is a net debtor and the net debt (vs. "overseas") increased "over the last 2 decades". But maybe you are, like me, not from the U.S. ...  

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#6) On June 27, 2009 at 4:24 PM, dwot (28.88) wrote:

portefeuille, I think was meant is that businesses have been sold to over seas companies.  I think that is true, the US has been selling off its assets and also borrowing. 

Transferred capital is probably an incorrect way to refer to the selling off of income producing assets.

Not good, way more debt and less income producing assets...

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