Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: THURSDAY, February 16, 1995 TAG: 9502160069
SECTION: BUSINESS PAGE: B-8 EDITION: METRO
SOURCE: JOHN CUNNIFF ASSOCIATED PRESS
DATELINE: NEW YORK LENGTH: Medium
When you look at the numbers, you see at a glance one of the most fundamental changes in household financial habits - the transformation from saving to borrowing.
Everyone from President Clinton to your most dissolute relative extols the virtues of saving and the evils of borrowing, and then does the opposite. Words, mere words. Numbers, not words, are what count in financial matters.
In 1950, savings averaged 12.3 percent of national output, a percentage that would, if maintained, have put the United States today in the company of such countries as Germany and France and not far behind Japan.
But the savings rate has been in a steady decline since then: About 9 percent during the 1950s and 1960s, about 8.5 percent in the '70s, 4.7 percent in the '80s and 2.4 percent in the '90s.
Now, look at some borrowing figures.
Consumer installment debt has risen a record $118 billion during the past year, accounting for 17.8 percent of disposable income - and a record 20 percent if you include auto leases and home equity loans.
Without even counting those auto leases and equity loans, the sum of household borrowing now is equal to more than 90 percent of after-tax income, compared with about 70 percent in 1980.
A couple of news items document the situation:
Merrill Lynch, the securities firm, found in a survey (conducted in 1993) that half of all American families had less than $1,000 in net financial assets.
Visa U.S.A. said consumers last year charged nearly $291 billion on their Visa cards, a 28 percent increase from 1993. While much of that amount was paid off quickly, the debit charges rose 59 percent in one year.
The trend has been around long enough for scores of cause-seeking studies, but Washington, academe and the banking-business community have failed to agree on any one explanation. What they do agree on is its seriousness.
In a paragraph, low savings means less capital for investment in a larger and more productive economy, thus slowing improvements in the standard of living. Everyone, not just business, gets hurt when investment slows.
If there isn't proof, there are hints about the reasons.
Stimulation, for example. Americans are under constant bombardment to live the good life now, not later. It emanates from almost every television and radio program, from almost every publication, from your mailbox.
Getting you to spend money has become an art and a science. And if you don't have the money, don't worry, because easy terms can be arranged quickly no matter how poor your credit rating, and no payments are due until April.
Incentives are involved. Incentives to spend, of course, but incentives not to save. Save - and enjoy paying income taxes on your alleged earnings; borrow on your house and get rewarded with an income-tax deduction.
Stress plays a role. Many households today try to get by on less disposable income than two decades ago. Taxes, inflation and paycheck stagnation contribute to their predicament. So they borrow to maintain their lifestyles.
Government might play a role. Some critics of government spending correlate budget deficits and government transfer payments with disempowering the middle class. While some linkage can be shown, the proof can't yet be documented.
Regardless of the reasons, the trend is ominous, and it is drawing a line on the charts that points to disaster. Short-term, the getting and spending might make the economy boom. Long-term, it creates a boom of another sort.
by CNB