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-- Posted Thursday, 2 September 2010 | | Source: GoldSeek.com
Is Savings and Investments Part of the Solution or Part of the Problem? By David Collett Over the last few months there seems to be a growing awareness that the world economy has come up against an invisible wall. No matter how hard mainstream economists and other market commentators try to identify and explain what the missing piece of the puzzle is, the solution to the economic crisis seems to evade them. Many of them however, continue to stress the need for increased savings and more investments, yet they are at pains to identify the source for further growth in demand that would be required to absorb any increase in production. The averred low savings of America and corporate America’s unwillingness to commit its substantial cash resources to more investments are heavily criticized. The case for increased savings and investments was summarized as follow by a guest on one of the popular TV business channels: “We should consume less and produce more”. Could this really be a sensible solution for an economy that has a lack of demand and not of supply? Growing debt and its impact on households’ balance sheets is also a popular subject for discussion. A catch phrase that is often used to stir up American guilt, especially with regard to public debt, is that the “debts we accumulate today will have to be repaid by our children in future”. In addition, a lot of emphasis is placed on the demands of debt holders. In our opinion, the search for the missing piece of the puzzle will be ineffective unless we pursue the dominant and originating causes of the Credit Crisis. Similarly, it’s important to put the issues related to savings, debt and investment into proper context. This blog is the third in a series of blogs where we try to unravel the dominant and originating causes of the Credit Crisis.
Could a savings glut be one of the originating causes of the Credit Crisis? How do we measure or define savings? The measurement most commonly referred to is the “personal savings rate” (PSR). The PSR is calculated as the difference between disposable (after tax) personal income and personal outlays (mostly consumption expenditure), expressed as a percentage of disposable income. The PSR – charts are often used to demonstrate that the United States’ savings rate has dropped precipitously from around the early 1980’s. This decreasing savings pattern was considered a huge problem for America’s economic wellbeing in the years preceding the Credit Crisis of 2008. These days, market commentators tend to blame the increase in PSR for the timid recovery of the economy. The chart below is typical of the charts which are used to demonstrate the decrease in the personal savings of Americans.
Courtesy of SaschaMeinrath.com
There are many ways to measure savings but none of them are foolproof. For example, the data used to calculate PSR was changed several times as shown by the graph below where the blue line represents the original measurement and the red line the current measurement. Michael Mandel, who wrote the article “A Fun Fact About the Savings Rate” (Bloomberg Businessweek), stresses that savings is a residual of disposable income and consumption and if any of these items are subsequently revised, savings will automatically be affected. According to him the savings rate has been changed since it was first published in the 1980’s. For example, in 1981 the savings rate was reported as 5.3% (blue line) but it was subsequently adjusted to 10.9% (red line). Economists and journalists at the time bemoaned the low savings rate, says Mandel, and emphasizes that statistics like savings rate are prone to large revisions.
Courtesy of Bloomberg Businessweek
There are valid objections against the methods used to measure savings. Some measurements exclude capital gains (realized and/or unrealized); others count pension fund contributions as an expense instead of a saving; and some exclude interest payable, durable consumer goods and housing purchases. However, none of the above criticisms make the measurement and reporting of savings irrelevant, as long as the user knows that each method of calculating savings or the savings rate has its shortcomings. In Part I and Part II of The Dominating Causes of the Credit Crisis, we stated that growing wealth inequality led to the accumulation of savings (or capital) in the hands of a small percentage of households at the top of the wealth ladder. We further argued that such accumulation of savings became excessive in the sense that it exceeded the capital required for investment in production capacity to satisfy the demand for goods and services or the amount of savings that could be safely channeled to the consumer by way of credit. Savings therefore had to compete for limited investment opportunities, thereby forcing down the expected rate of return on investment. Now how do we reconcile this argument with the case of a country where its savings, according to most reports, decreased so fast over the last three decades? As said before, some of the reports on savings rates have significant deficiencies, but to get to the heart of the matter, one must have a closer look at the distribution of savings between households.
Savings of Households by Income Group Analyzing the Consumer Expenditure Surveys done by the US Department of Labor from 1984 onwards, it is clear that the savings pattern in the United States varies significantly between households from different income groups. Table A below reflects the annual income, spending and savings patterns of households according to income earnings. The households are divided in two groups; the first group represents the bottom 80% of income earning households and the second group represents the top 20% of income earning households. The aggregate average income, expenditure, savings values and PCR for the bottom 80% is compared to the top 20% in the top part of Table A. The data has the following characteristics: capital gains are not included in income; pension contributions are included as an expense and only net annual outlays on housing and transport vehicles are deducted as expenses.
Table A
Source: US Department of Labor
The above data reveals a number of important trends and patterns. It’s clear that the top income groups increased their savings substantially from the early 1980’s, while the bottom 80% made ample use of their savings to keep up their consumption spending. If one would have included capital gains, which mainly accrued to the top 20% group, the difference in savings rates between the bottom 80% and top 20% would have been even more pronounced. The chart below reflects the increasing savings rate of the top 20% and how it accelerated from 1996 (19.5%) to 2008 (35.6%).
Source: US Department of Labor Secondly, despite the fact that the 80% group shared in less than 54% of total income, they contributed to more than 61% of total expenditure. In order to achieve this, they had to draw upon their savings or make use of significant amounts of credit. Furthermore, although their share of total income dropped by 2% from 53% to 51%, the bottom 80% hung tough by dropping only 1% on the consumption side. In the fifties and sixties the bottom 80% received well in excess of 55% of total income. Unfortunately, we could find no reliable data to determine comparative ratios for consumption but based on a steady increase in PSR and relatively small growth in debt in the 1960’s, the bottom 80% households’ share of consumption was probably lower than 61%. In False Gods Fleece the Faithful, the significant influence of these changes on the economy is explained by way of an economic model; showing why it leads to an imbalance between supply and demand and why the debt of the bottom 80% tends to increase towards unserviceable levels. Using Net Financial Investment as a Tool to Measure Savings Some economists argue that one ought to use the item “net financial investment” (NFI) to measure PSR. This approach has considerable merit as it measures the extent to which households are net demanders of funds or to what extent households supply funds to the rest of the economy. In simple terms; the increase in liabilities of households that consist mainly of mortgage finance and consumer credit, is deducted from the aggregate investments into financial assets (equity, deposits, pensions, corporate bonds etc.) to determine the NFI. A positive NFI balance means that households are net suppliers of funds and a negative NFI means households are net users of funds. Paul L. Kasriel, Director of Economic Research from The Northern Trust Company wrote an insightful article on savings and other economic data for households in the United States. He points to the historical trends of NFI, showing that since World War II households generally contributed funds to the economy and that this trend only changed in 1999 when households for the first time became net demanders of funds from the economy. This new trend, as shown by the chart below, continued until 2007 when households once again became suppliers of funds to the economy.
Courtesy of Safehaven.com
One of the main reasons for households becoming users rather than suppliers of funds from the late nineties to 2006 was mainly due to the steep increase in their demand for mortgage finance. Not only did it contribute to the formation of a housing bubble, but it also gave impetus to greater consumer spending by enabling consumers to extract cash from growth in home equity. Other factors may have also played a role in the steep decline in NFI from 1999 to 2000. Part of it could be attributed to higher personal taxes, higher spending and bigger than usual discrepancies in the US Flow of Funds Account (FFA). The above chart is not inflation adjusted, but the graph below where the NFI is reported as a percentage of disposable income, confirms the basic downward trend.
Source: US Flow of Funds Account
Other limitations of the above NFI charts are that they neither reflect the annual capital gains in the value of financial assets, nor do they distinguish between the various wealth groups’ (either by income or net worth) supply of or demand for funds. However, they do demonstrate that US households as a whole were major suppliers of funds to the economy, especially from the 1970’s and that this trend changed abruptly from the late nineties to 2005. It raises the following questions: 1. Does this imply that US families overspent across the board from the late nineties through to 2007? and/or 2. Does it refute the argument of a savings glut, over investment, over lending and lower return on investment? The answer is “no” to both of these questions. The saving patterns for various wealth groups were different over this time period and as shown in False Gods Fleece the Faithful, the growing divide in income distribution tends to lead to a situation where the middle and lower income groups will borrow more while the top income groups will save more. Over short periods of time, like during the housing bonanza in the United States, the NFI (excluding unrealized capital gains) may turn negative, but in the longer term the NFI was bound to turn positive again. We will now look at the growth of the nation’s (all households) balance sheet starting from 1962 through to the 1st quarter of 2010. In addition to the balance sheet for all households, we will also analyze the balance sheets of the bottom 80%, top 20% and top 1% by net worth separately. The Balance Sheets of US Households as an Indicator of Savings In dissecting and evaluating the balance sheet of American households, it is important to grasp the concept that the vast majority of US assets, whether financial or tangible, are directly or indirectly owned by American households. Americans held 84% of all corporate equities (directly or indirectly) in 2005, while foreigners held around 10%. The owners of the remaining 6% are unknown but the major share probably belonged to federal and state governments and government agencies. The implication of this ownership of equity and other forms of financial assets is that US households have a “majority” interest (indirectly) in the assets of all American business institutions and corporations. Insofar as households are not the owners of corporate bonds, deposits or other credit market instruments, they also have an indirect interest in these assets via their ownership of equity. As these institutions and businesses prosper, US households will prosper in tandem. Also, the major portion of every loan made by US banks, lending institutions or bondholders, is indirectly “owned” by American households. If one assumes a theoretical situation, where all these corporations and institutions liquidate their assets simultaneously, the majority of proceeds (after setting off liabilities) would ultimately be returned or distributed to US households. The US households’ combined balance sheets are therefore a good reflection of America’s total wealth. In order to make a sensible judgment on the economic health of American households’ balance sheet (BS) and its savings, it’s necessary to look at how the BS of each wealth group (bottom 80%, top 20% and top 1%) has developed over time. Of specific interest is each group’s demand for funds or its supply of funds to the economy. Insofar as capital gains on financial investments are not realized by households, or corporate profits have not yet been distributed to households at BS – date, one can assume that much of these gains or undistributed profits are reflected on the asset side (at market value) of the household BS. Thus, increases or decreases in the value of households’ NFI are fairly comprehensive indicators of overall savings of the United States as a nation. Let us for the moment deviate from savings and balance sheets to touch on the issue of debt. The top households of most industrialized countries supply most of the funds or savings via NFI to their economies and are therefore the owners or holders (mostly indirectly) of most debt. Although many of these top households have little say in how their savings are invested or to what extent it is converted into complex debt instruments, they profit or suffer in tandem with the performance of these debt instruments. Most economists and economic journals refer to the owners of debt as banks, creditors, bondholders or investors, often in a way that creates the illusion that they are aliens or unidentifiable debt objects (UDO’s). The UDO’s prerequisites or demands for supplying new credit or refinancing old debt are often used to push the public and governments to change policies that mostly favor the debt holders whose interests are often aligned with those of the wealthier households. Add to that the sentimental argument mentioned earlier that the debts we accumulate today will have to be repaid by our children, and you are bound to secure massive public support for any suggested solution to reduce debt. Let us describe a typical scenario that leads to a debt trap. The wealthier households (WH) are the ultimate owners of most capital, savings and debt, whether directly or indirectly. Via their UDO’s the WH will lend to consumers to buy the goods and services produced by the vehicles in which they invested their savings. The credit to consumers will continue until their ability (mainly wage income) to service their debts is overextended and their collateral (mainly home equity) becomes insufficient to secure their debt. Upon a slowdown in the economy the WH will prefer to lend to governments, which is a more secure investment, in order to stimulate the economy and to improve their chance for recovery of existing consumer debt. When government debts, however, grow to unsustainable levels the WH sense the pressure for higher taxes to balance the books. Knowing that they will most likely have to service the biggest part of any new tax bill, they exert pressure on governments from their positions as UDO’s to implement austerity measures which would require most sacrifices from the middle and lower income households. As the public are in awe of UDO’s, their demands are used to influence public opinion, even to the point where the public will support such austerity measures with enthusiasm. In the process every conceivable economic argument on the un-sustainability of growing debt will be aired to support such policy changes. Of course, many of these arguments have considerable merit, but it often comes down to “intellectual dishonesty”, as the identity of the beneficial owners of debt is disguised, the average consumer remains oblivious to the causes of its dilemma and the alternatives available to them are not explained in proper context. In plain English the situation can be explained as follows … Due to increased productivity, we (all households) produced more with less, but for various reasons our (WH) investment vehicles (manufacturers, service providers, etc.) did not increase your (lower income households) wages in step with the rise in productivity. Your bad luck was our good fortune and we (WH) accumulated more profits, savings and capital, much of which we reinvested to produce more goods and services. Over time you became less and less able to buy all the goods and services we produced. But we did not let you down; because we gave you credit (via the UDO’s) to buy things that you could never afford before. Simultaneously, our fortunes grew with the increase in your consumption, making both of us very happy. With a little encouragement our governments lowered taxes from the early eighties that increased your disposable income. Due to big decreases in high marginal tax rates and especially lower rates for capital gains, we benefitted even more than you. But we saved most of our gains and that enabled us to produce more and lend more to you so that you could buy more. Once again, that made all of us happy. Unfortunately it was also during this period that many governments started to accumulate debt. At the time, we didn’t mind because it helped to stimulate the economy. But the party had to end some day as your debt reached unsustainable levels. Our UDO’s said; “Sorry chaps, no more credit for you; but don’t lose hope as we will now lend to governments so they can help you and us by stimulating the economy”. Unfortunately, government stimulus did not have the desired results – it created few jobs, your income has not increased much and most of you remain ineligible for more credit. Furthermore, growing government debts have become unsustainable because the gap between revenue and expenses has become too wide. Our UDO’s cannot continue to finance that gap. Basically, you, the governments and we have three choices or a combination thereof: (i) households have to pay more taxes, or (ii) the governments have to lend more, or (iii) the governments have to implement austerity measures. Our lending to governments is now fronted by UDO’s. They limit the extent of lending to governments, while demanding more financial discipline. If governments raise taxes, we (WH) will have to pay the greater part of such a tax bill, because we earn a great deal more than you – that would be unfair. In any event, nobody wants to pay more in taxes. It leaves us with austerity measures as the only alternative, which means that governments will have to cut services, cut your entitlements, decrease aid to the unemployed and so forth. After all, we all had a great time, but you guys borrowed too much – so we suggest you tighten your belts to pay for the excesses. If we don’t recover our investments from you now, we fear your children will not be able to repay ours in future.
Let’s get back to savings and the balance sheets (BS) of American households. Below, we analyzed the balance sheet for the nation as a whole, the bottom 80%, top 20% and top 1% – all measured in terms of net worth.
Table 1
Sources: US Flow of Funds Accounts State of Working America
Table 1 shows that all categories of households supplied funds to the economy as the NFI (financial assets less liabilities) is positive for all groups. The above NFI however, is a cumulative total at a specific time. We will only be able to determine “Savings” when we look at subsequent BS’s as we calculate the increase or decrease in the NFI figure over the relevant periods (e.g. 1962 -1983). The item under the heading “Savings Rate” represents that portion of the increase in households’ equity, that was saved over the relevant period as defined under the NFI approach (Increase in NFI/increase in equity).The item “Increased Equity” represents the percentage increase in equity from one BS date to a subsequent one (e.g. 1962 – 1983).Table 2 below shows the difference in the savings patterns between the bottom 80% and top 20% households. While both groups’ equity grew by more than 400% over the 21 year period, the top 20% group saved 70% of the increase in equity, while the bottom 80% in effect dipped into its savings and “used” $62 billion of funds. Table 2
Sources: US Flow of Funds Accounts State of Working America Working Paper no. 502: The Levy Economics Institute of Bard College
Table 3 below reflects the BS position as at end of 2004. When we compare the second 21 year period (1983 – 2004) with the first 21 year period (1962 -1983), the divide in wealth accumulation between the bottom 80% and the top 20% becomes more pronounced. First, the growth in equity of the top 20% (377%) is substantially higher than that of the bottom 80% (250%). Secondly, the top 20% still saved around 70% ($24 trillion) of the increase in the value of its equity while the bottom 80% had negative savings by “taking” $2 trillion from of the economy. Overall, however, households saved 55% ($22 trillion) of the increase in the value of their equity.The bottom 80% group’s debt to asset ratio also moved sharply higher from 30% in 1983 to 46.1% in 2004, while the top 20%’s debt to asset ratio barely moved from 8.0% to 8.7%. The best performer by far, however, was the top 1% group. Their debt to asset ratio actually declined from 5.3% to 3.9%.When one compares the growth in equity values with the growth of the economy as measured by GDP (FFA) for the two periods of 21 years (1962 – 1983 versus 1983 – 2004), two distinct trends are apparent. In the first 21 year period, the economy grew (503%) slightly faster than household equity (467%) but in the second period household equity (353%) outpaced economic growth (218%) by a substantial margin. Why did the value of equity grow so much faster than the economy? One reason could be that the markets accepted a lower rate of return. When savings compete for limited investment opportunities the rate of return required by the market will tend to go lower, resulting in higher market values for assets with the same income stream. Another reason could be that markets anticipated higher growth. When the markets, however, come to the conclusion that it is unlikely that the expected growth will materialize, asset values may drop or even collapse.
Table 3
Sources: US Flow of Funds Accounts State of Working America Working Paper no. 502: The Levy Economics Institute of Bard College
Table 4 shows a huge divide between the fortunes of the bottom 80% and the top 20%. The debt to asset ratio for the bottom 80% increased to an uncomfortable 53.6% while the top 20% and top 1% slightly improved their debt to asset ratios. Also, the top 20% increased their share of total equity of all US households from 79.4% in 1962 to 88.2% in 2007. This trend continued as the top 20% now (2010) owns more than 90% of all US household equity. The top 1% also increased their share of household equity from 32% in 1962 to over 38% in 2010. This concentration of wealth (measured by net worth or income) has increased at a faster pace in the last decade and is one of the important factors that have to be taken into account in determining the dominant causes of the Credit Crisis. On the savings side the divide between the two groups could barely be more pronounced. The top 20% saved 85% of the growth in value of its equity and the top 1% saved 92.5%. The top 20% group contributed more than $9 trillion to the economy in savings over the three year period. The top 20% households’ equity also grew by a healthy 24.5%. The BS of the bottom 80% on the other hand shows no growth in equity. This group “took” another trillion dollars in funds from the economy to finance their acquisition of assets (mainly residential property) and consumption spending.
Table 4
Sources: US Flow of Funds Accounts State of Working America
Table 5 shows how the Credit Crisis impacted on the two household groups. As a nation it seems that US households BS’s are still in good shape. The danger lights are flashing because the position of the bottom 80% is deteriorating fast, while the top households have accumulated enormous amounts of savings, probably much more than can be absorbed by the slower growing economy.Although the top 20% group lost 12% in equity one could hardly say their BS’s are unhealthy as their debt to asset ratio deteriorated slightly from 8.6% to 9.4%.The BS of the bottom 80% of households, however, is a story of continued deterioration. Nearly 30% of their equity evaporated and their debt to asset ratio rose to 61%. If one were to “stress test” their balance sheet by applying a worst case scenario (Japanese recession scenario), where US home prices were to fall by 80% (21% decrease already accounted for in 2010 BS) from their 2007 values, the bottom 80% group will be decimated as their total liabilities would exceed total assets by more than $300 billion. Applying a similar “stress test” to the BS of the top 20%, and especially the top 1%, would not raise too much concern as their debt to asset ratios would merely rise to 11% and 4% respectively. Such a significant drop in home prices would probably also affect other asset prices negatively, such as share equities. However, one would have to assume Armageddon like economic conditions before the top households’ BS would become a matter for serious concern.
Table 5
Sources: US Flow of Funds Accounts State of Working America
The fact is that there are two worlds when we look at savings and US household BS’s; the bottom 80% that “used” funds (in excess of $3 trillion) and the top 20% that supplied nearly $30 trillion in funds to the economy since 1983. The bottom 80%, as a group, is highly leveraged (above 60%) while the top 20% group and especially the top 1% have quite healthy BS’s. When 80% of the households of the world’s greatest growth engine over the past century face possible annihilation and there is no viable plan on the drawing board to prevent this or to enhance its recovery, the writing is on the wall.The above method used for measuring savings does have its limitations though, as it measures total wealth and saving flows, which includes big chunks of unrealized profits. However, it adds to the understanding of US households saving patterns, the composition of its assets and debt and the difference between the various wealth groups. For the sake of clarity it must be said that the household groups referred to as the bottom 80% or top 20% or even top 1%, measured and classified by net worth (household equity), do not include exactly the same households as measured by earnings. However, some studies point to a high degree of homogeneity between the abovementioned groups, irrespective whether they are measured by earnings or net worth. Furthermore, the BS of a group as a whole is not necessarily a reflection of the typical BS of individual households in that group. For example, some households in a group may have BS’s with much higher debt to asset ratios and for others the opposite might be true. There is also the factor of mobility as households may move from one group to another over time. Young couples become more affluent with time, while retirees with good BS’s may move down the order when measured by income. But one can become too pedantic in trying to focus on every possible deficiency in analyzing the overwhelmingly evidence that points to growing wealth concentration. The focus of the debate in this article is not about the morality or fairness of wealth and income distribution, but on the threat which continued wealth concentration holds for the US and world economy as a whole. When too much wealth, earnings and savings accumulate in the hands of too few, they are able to produce more goods and services (via investments) than what the consumer can consume with its limited resources. While new investments will create more jobs, the real question is whether such new jobs could ever create sufficient demand to consume the extra production from such investments. The answer must be no. In a world where wealth inequality is growing at an increasing pace, new investments cannot even create sufficient demand to absorb the additional supply of goods and services resulting from such investment, not to mention the existing overcapacity. This is a catch-22 situation and may well be one of the missing pieces of the puzzle needed to bring visibility to the so-called “invisible wall”.
Savings on a national levelThe national savings rate (NSR) which measures savings on a national scale is another way of looking at savings. It consists of personal savings, undistributed corporate profits, net government savings and consumption of fixed capital. The US NSR lingered around the 20% (as a percentage of GDP) mark in the fifties and sixties, then dropped a few percentage points in the seventies and eighties before it settled around 15 – 16% in the nineties and early 2000. From 2007 the savings rate dropped to around 10% in the 1st quarter of 2010, mainly due to the US government’s increasing budget deficit, which is a function of smaller revenues and increased stimulus expenditure. The opposite side of savings is private and government fixed investment. The difference between savings and the total sum of fixed investment is shown as “net borrowing” in the US FFA. The trends in corporate fixed non-residential investment (measured against GDP) and Government fixed investment are reflected in the chart below. The most notable trend is that corporate and government fixed investments moved in opposite directions, which suggests that corporate fixed investment gradually replaced government fixed investment since the early sixties. The significance of the above trends and the potential influence that government fixed investment may have on the balance between supply and demand, will be discussed in coming blogs.
Source: US Flow of Funds Account
China as a country is the biggest saver in the world even though its economy is substantially smaller than that of the United States. According to a report by John Ross, China saved 54% of its GDP in 2008 which amounts to $2.3 trillion. As can be seen from the graph below, the US was the second biggest saver in value in 2008 and contributed $1.8 trillion followed by Japan and Germany with $1.3trillion and $1 trillion respectively.
Courtesy of Key Trends in Globalization
The IMF estimated total global savings to be roughly $11 trillion in 2005. This figure, which is probably much higher now, represents the excess of the world’s combined income over its combined consumption for 2005. We could not find a reliable amount for the accumulated international savings as at 2010 but some sources estimate this figure at around $70 trillion. This estimate does not appear to be unreasonable in light of the above data and lends support to the view that the world has accumulated a savings glut over at least the last decade, with important consequences for the US and world economy.Global markets have unlocked national savings in the sense that capital and savings are capable of flowing from one country to another. A major portion of capital flowed from China, Japan and oil producing countries to the USA, especially over the last decade. In effect, they reinvested most of the benefits derived from a favorable trade balance with the United States. The world as a whole invested nearly $7 trillion in US credit markets over the past 15 years, according to the US FFA. A major portion of this investment was entrusted to the US’s financial system and credit markets. Much of this money found its way to the American consumer who according to The Brookings Institute, accounted for more than one third of global consumption between 2000 and 2007. The tool used by the financial system to get this money to the US consumer was mainly through mortgage finance. One of the biggest targets was the American middle class. Its impact on the BS’s of the bottom 80% of US households is shown in tables 2 to 5 above.It also led to overinvestment in industrial capacity. We have previously shown to what extent the United States overinvested in production capacity and the decreasing trend in capacity utilization over the last three decades. The United States, however, was not alone in creating too much capacity; many industrialized and developing countries were also guilty of creating excess capacity. China especially is guilty of creating excess capacity by investing enormous amounts of money in industrial production facilities. The chart below reflects the consequences of the investment boom, namely excess capacity.  Courtesy of China Bubble Watch
The savings glut also had a depressing influence on interest rates over the last two decades as too much capital chased too few investment opportunities, forcing investors to accept lower rates of return. The chart below shows how the 30 year mortgage rate has declined over the last three decades. The downward trend is still intact since it has dropped below 5% in 2010. Although high inflation in the early eighties exaggerated the downward trend, real interest trended lower in the last two decades. Although central bank interest rate policies played an important role, this cannot fully explain the downward trend over such a prolonged period of time.
Courtesy of Straight Talk About Mortgages
Can high savings and investment become counterproductive, especially in times of recession? Sure, it can. Investing in an environment of overcapacity with stagnating demand can be counterproductive. If investment over the last three decades created overcapacity, it has the necessary implication that it failed to create sufficient jobs and income to keep supply and demand in balance. Why would it be different this time? Future investments can only contribute to a sustainable economic recovery if structural changes are made that will ensure that demand increases sufficiently in order to absorb not only supply from current capacity, but also supply from future capacity. We will expand on this subject in coming blogs. David Collett is a chartered accountant with more than 25 years experience in the field of forensic investigation. He has acted as an expert on many subjects such as business, investment and share valuations; fair presentation in financial statements and prospectuses; lax credit standards, credit risks and professional liability. Over the past decade he closely followed the financial markets. Through a series of presentations made to the finance and investment communities, he forecasted the collapse of financial markets and the 2008 stock market crash. For more information about David and his work, please visit http://www.false-gods-fleece-the-faithful.com/. © Copyright David Collett 2010. Whilst every effort was made to ensure the accuracy of this article, neither this document; nor its author, David Collett; nor any publisher of this article; offer any warranties (whether express, implied or otherwise) as to the reliability, accuracy or completeness of the information appearing in this article. Neither do any of the above parties assume any liability for the consequences of any reliance placed on opinions expressed or any other information contained in the above article, or any omissions from it. Its content is subject to change without notice. Any information offered, is intended to be general in nature and does not represent any investment or business advice of any nature whatsoever. If you choose to rely on such information you do so entirely at your own risk. Neither David Collett nor any third party involved in publishing this article, assume any responsibility or liability for the outcome of such reliance. Contact Us: Zenda@anchorage-investments.com http://false-gods-fleece-the-faithful.com
-- Posted Thursday, 2 September 2010 | Digg This Article | Source: GoldSeek.com
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