The Profligate Consumer

The news media has everyone just about convinced the "conspicuous consumption" and "pecuniary emulation" of US consumers is out of hand. We drive our Hummers home to our gated mansions (which we purchased with no down payment!), plop ourselves down on our leather couches, turn on the 60" plasma TV, and crack into some lobster for dinner. Yes, we live quite the life of extravagance. And almost all of the spending is funded by debt, debt and more debt. In other words, we're not saving any money. We're even unsaving! That can't be good.

But let's step back into reality for a bit. The truth is we're not fat, lazy and self-indulgent mouth breathers. There are two main reasons why the "lack" of savings shouldn't concern you: the savings rate, the oft-cited statistic that "proves" the US's profligacy, is a sham; and, debt is not evil.

Right now, the US savings rate is in negative territory, meaning consumers are spending more money than they make. That sounds really scary, doesn't it? Not to worry. The savings rate is a bogus government statistic that doesn't tell you much about actual saving habits. It's a residual calculation of the difference between what the government deems "personal disposable income" and "personal consumption expenditures." Each of these is flawed.

Personal income includes employer contribution to pension and insurance funds but excludes when the benefits are paid out of these funds. Think about that for a minute. By the government's standards, all those people getting money from their pensions are spending imaginary money! That doesn't make any sense.

On the other side of the equation, the government spending numbers are also faulty. Simply put, it treats all spending the same. If you go out and spend $10,000 to remodel your home, that's treated the same as $10,000 of food purchases. Even a dummy can see this makes no sense. The home improvement adds to the value of your home, making you richer. The food, on the other hand, is just making you fatter.

And now for the wackiest part of the whole thing. The savings rate doesn't include capital gains. Think about the way most Americans "save." Most put money into 401(k), IRAs and other savings plans. None of the money you make on your contributions ever makes it into the savings rate data. So that $15,000 you put in your 401(k) this year gets counted as $15,000 in savings, not the $100,000 it becomes later in life. Here's another example. Say you bought a home in 1970 for $100,000. Now it's worth $1 million. Guess what? You didn't save anything. If you take capital gains into account, there's a good chance America saves the most.

By now you understand that the savings number quoted by the media is useless government cheese. But surely the massive debt Americans are accumulating is a horrible predicament, right? Not quite. Rarely is carrying zero debt and socking away every penny of extra earnings the correct decision. Much like a corporation, individuals can leverage their balance sheets to take advantage of low interest rates and higher returns elsewhere. And that's exactly what they've been doing in recent years to great success. Household net worth has increased an average of 10% a year in the past three years, a time when virtually every member of the media decried the precarious position of consumers. Certainly, not all debt is good debt. We're not condoning maxing out your credit card at Neiman Marcus this weekend. But sensible accumulation of debt can be a good thing. How would most people even go to college without it?

If you still think the "lack" of US savings is destined to sink the economy and the stock market, then what do we make of Japan? Japanese are statistically some of the biggest savers in the world. Yet, their economy and stock market have been in the doldrums for over a decade. Meanwhile, the over-indebted, spending-happy US has produced phenomenal growth (and stock returns). Go figure.

Unfortunately, you'll probably continue to see foreboding stories of negative savings and over-indebtedness. But do not be alarmed. It's just the media focusing on the big, scary stories that sell. The reality is that US consumers are better off than ever before.