Families Hoard Cash 5 Years After Crisis

http://hosted.ap.org/dynamic/stories/U/US_GREAT_RESET_INVESTING_ABRIDGED?SITE=AP&SECTION=HOME&TEMPLATE=DEFAULT

by vellum • 13 years ago

57 63 13 years ago

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lolwutf• 13 years ago

As a mid-twenty-something who thinks he's pretty sensible overall with his cash, it's reassuring to see I'm not alone, but running with the current generation of financial wisdom.

buyx2• 13 years ago

Households controlling spending and debt may be smart, but withdrawing from stocks and investing in bonds strikes me as having been a panic move - not wise at all.

kfk2• 13 years ago

Thing is, stocks are very scary, you can't just look at a balance sheet and make predictions because share price depends on market momentum. But you can look at a balance sheet and see how likely is that you will get your bonds money back.

forgottenpaswrd• 13 years ago

"but withdrawing from stocks and investing in bonds strikes me as having been a panic move - not wise at all."

Stocks now are totally over priced, and investing in bonds is not wise when the central Banks are printing money.

So the best thing you can do is use your money on yourself in a productive way.

CmonDev• 13 years ago

Might be useless when the whole thing goes down: http://www.bloomberg.com/news/2013-10-07/a-u-s-default-seen-...

x0x0• 13 years ago

as Dickens said:

   Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen 
   [shillings] and six [pence], result happiness. Annual income twenty pounds, 
   annual expenditure twenty pounds ought and six, result misery.

Particularly as a startup employee, you have to understand your job can just disappear on short notice. Having 6 mos of living expenses in cash and more in general investments is one of the best feelings; I know that virtually no matter what goes on with my employer I have plenty of time to find a new job.

ps -- yes, you too can save money. For example, I use a crappy android phone on a cheap plan and don't have cable. Those two choices alone save me roughly $2k/year; over 10 years that's $20k. I'm not saying those should be your things, but I bet you've got something.

BillyMaize• 13 years ago

I do the same! There is never anything on TV worth watching when you have the internet and lots of books, so that saves me $50/month at least, and I have a cheap android with a $30/month unlimited text and data with 100 minutes and that is more than enough to get by. The savings for me is more like $1200 a year, not $2000 though. My girlfriend and I have also started cooking instead of going out which saves a TON of money and living nearby where we work saves a lot on gas (at least $1000/year).

IanCal• 13 years ago

The key thing I always try to aim for is "Spend less on things I don't care about". A good motivator is to use some of the money you save from unimportant (to you) things on stuff you really care about.

The money I save on not having Sky TV (or similar) gives me some cash in the bank and fresh roasted coffee delivered to my door each week. I save money and get coffee! I find my life slowly filling with things that make it better and memories of fantastic experiences, without spending anything extra.

We didn't get seat covers at our wedding, because I wouldn't remember anything about them now. We used some of that money to get some really nice flowers, which became nice gifts and is something everyone liked.

I know that virtually no matter what goes on with my employer I have plenty of time to find a new job.

It also means the answer to the question "What's the worst that can happen?" starts to become "Things will be generally fine". That's a phenomenal weight to be lifted.

glomph• 13 years ago

Isn't Micawber's philosophy that something good will hopefully turn up? Cautious optimism. Not exactly the perspective you have.

gaius2• 13 years ago

For taking that kind of risk, I'd hope you have a decent chunk of equity in said startup. That money is effectively the capital you have invested in the venture working out. It may even be more than the founders themselves have invested.

hackula1• 13 years ago

I keep a 6 month emergency fund as well. Not only does it cushion me from something like a layoff, it also gives me the freedom to resign, should I run into something unreasonable or unethical. As a rule, I try to prevent myself from being backed into a corner.

arielweisberg• 13 years ago

One way to get a leg up on retirement and start building an emergency fund is to start contributing to a Roth IRA. The principal on a Roth IRA is post tax dollars that you can withdraw without an express penalty (other then the fact that the rate you can contribute the money back each year is capped).

As a bonus you will get much lower fees than if you contributed to a 401k that does not have employer matching. Check out Vanguard.

It's not a substitute for having some amount of hard cash, but 6 months hard cash is a lot to have lying around IMO. There is going to be some risk depending on how you choose to invest.

I totally agree WRT to the freedom and peace of mind, that is huge for me.

cmdkeen• 13 years ago

If debt jumped 30 something percent before the crash then it dropping by a percentage point a year still means people are massively overburdened by debt compared to where they used to be.

Growth to be sustainable can't be debt fuelled, so it's hardly the fault of consumers for not spending, especially if their discretionary spending power isn't increasing.

Business confidence is picking up which should lead to more growth in that sector, combined with more employment - which is healthy growth, people get jobs and thus have discretionary income again.

a8da6b0c91d• 13 years ago

Total debt has ballooned around the world in this "recovery" because of government deficits, despite some consumer deleveraging. When the debt growth machine falters, we go right back into the 2008 deflationary crisis.

smcl• 13 years ago

(Disclaimer: not an economist, it's likely I'm talking nonsense) This is one of those situations where it's hard to grasp what exactly is right to do, and where the media doesn't really help. Individually it makes sense to save money, but as many people will no doubt note it is harmful if everyone does it - less money circulating meaning a slower recovery overall. It's also slightly counter-intuitive, the financial crisis came about due in no small part to under-capitalised banks so therefore it seems reasonable to think that more savings deposits and fewer mortgages\loans is a healthy sign.

Another confusing thing I've seen during reporting on the financial crisis is conflicting views on the prices of housing. Prices were sky-high during the boom, and to me it seems plainly obvious that they were not the correct value and needed to return to normal. Yet falling house prices are reported negatively, and rising prices are cheered. I can see why individually some people (home owners) would want to have rising prices, but surely overall a return to the sort of pre-boom valuations overall are what we should be aiming for. Oh well, not entirely sure what I'm trying to say, maybe just "Finance is weird"?

maxerickson• 13 years ago

Especially for consumer banks, under-capitalized is just a bad euphemism for over-leveraged.

As far as regional markets and economies, the trend of housing prices is an important health indicator, hence the tendency to cheer rising prices.

vidarh• 13 years ago

As a home owner, I want dropping prices, with some caveats.

The people who want rising prices probably quite often would also benefit from dropping prices.

People who treat their primary home as an investment and/or have investments in property may benefit from rising prices. Even if it is by second mortgages or by trading down to release equity.

But I'd guess most home owners want to trade up or get something roughly the same most of the time when they move - our choice of house is usually constrained by price. And then dropping prices is generally preferable, as we'll get more for our money.

The caveat is that I of course don't want the prices to drop so far that I'm left without equity for a new deposit. A slow steady drop that leave us able to finance a decent deposit after covering our mortgages would be the best deal for most house owners, and generally far better than price increases (that it is probably pretty much impossible is another matter - it'd distort demand badly because people would suddenly want to wait, and be able to aim far higher when they do make the jump)

The reporting of house prices, as you say, really badly reflects this. Presumably because people see the value of their home as a proxy for their wealth, given that it is likely to be substantial compared to savings and other investments for most house owners.

mseebach3• 13 years ago

Actually, what you're arguing for is less rapid growth - which is perfectly reasonable. Less rapid growth may look like a period of growth, then a period of contraction.

gutnor• 13 years ago

All the various scandal just showed the regular people that the investment market is a professional market with lots of insider privileges. If you play, you play by rules you do not control through the proxy of institution that do not have your interest at heart.

Combined that with a depressed real-people economy (money economy is doing fine, working people economy, no so much) it is a lot safer to build a good interest rate on your savings by simply saving more.

ihsw• 13 years ago

What's also driving her away may be something that runs deeper: "People feel like they're being ripped off everywhere," she says.

There we go, nail on the head. In the age of HFT-induced flash crashes, high profile systemic scandals (LIBOR, FB-style IPO abuse, and so forth), predatory and dubious bank foreclosures in the news -- individually these things make people skittish but combined they portray an acidic environment that does little else than subtly eat away at any gains you make.

Cheap credit has its advantages, however the very notion of "cheap credit" is worrying. If the economy is in shambles, then why do we get cheap credit? There's a distinct sense that it just isn't sustainable.

retrogradeorbit2• 13 years ago

The whole tone of the article is very dismissive. It's important to remember no real structural reforms were done after the 2008 crisis, and the underlying problem (the principal-agent problem in public financial institutions and their dealings in risk) remains. And now with even more leverage and greater exposure to even more complex derivatives and financial instruments. There's a reason people are behaving like this.

It's also either misinformed, or misleading. A statement like "Shunning debt and spending less can be good for one family's finances. When hundreds of millions do it together, it can starve the global economy." is false. Engaging in deficit spending in ones family would be a great idea if you had an unlimited line of infinite forgiveable-borrowing at 0% from a reserve bank. Similarly saving in the global economy could create large amounts of spare capital that would drive investment in real productive goods and services with healthy returns, if your savings investments weren't being front-run by a central bank with the legal right to print currency.

The investment/reward money pricing mechanism (interest rates) are beyond broken, they are corrupted. People saying this were once branded insane, and then libor was revealed. It goes on. This being said, the underlying movement by people leaves me with hope. It's good to see a lot of people paying down their debt, saving their money, choosing to take the financial medicine now, rather than later when the flavour will be even more bitter and possibly deadly.

mseebach3• 13 years ago

The underlying assumption is that the high consumption pre-crisis years is the natural state of the economy and the current situation is the outlier. I can't pretend to know which is true, but I really doubt that boom years were natural, however convenient that narrative it.

toyg• 13 years ago

The truth is in-between: everything about economic states is cyclical.

mabhatter• 13 years ago

Or maybe we're all STILL PAYING OFF our 2008 debts... You know 35% effective APR and our houses all having negative equity 5 years latter will do that.

The people writing this stuff live in a fantasy land where the rich took a 25% fall one year,but jumped right back on 10% gains the very next year... so why isn't EVERYBODY making plenty of money? They have absolutely no clue that WE took a 25% hit..but regular folk are lucky to have an aggressive 401k hit 7% in a year...

Not to mention that the rich just RAISED THE PRICE of everything to get their money back faster.

mikepurvis• 13 years ago

For more along these lines, see Sacred Economics: http://sacred-economics.com/

The entirety of the book's text is available on the website.

voodoomagicman• 13 years ago

What you are missing is that my spending is your income, and your spending is mine. As a thought experiment, if everyone were to stop spending entirely and pay down debt at the same time, no one would have any income.

In a more realistic situation - when a big chunk of the GDP is used to pay down debt, the resulting decrease in spending causes the economy to run below capacity and unemployment to be high. This is why low interest or stimulus is helpful - it encourages the economy to produce at its full capacity even though spending by individuals is reduced. This is necessary UNTIL private debt has been payed down and the economy is able to run at full capacity on its own.

_nb• 13 years ago

Paying off debt is a transfer, so while you're now spending less, your creditor is now able to either spend or make new loans.

VLM4• 13 years ago

The ancedotes in the article seemed determined not to mention lack of income or inflation as issues WRT spending.

For a good time google "labor force participation rate graph" at images.google.com. Unemployed people after unemployment runs out don't tend to go on shopping sprees.

Another fun one is looking at disposable income after real world inflation rates (not .gov imaginary rates). Especially as median income continues its permanent inflation adjusted decline.

The final whopper is plankton always do the opposite of profitable. So after a major drop, they sell, after a major rise, they buy. So if this article is vaguely trendsetting plankton going back in to the market to buy, thats a major sell signal. We've had a reasonably long ride up from the bottom; seems about right time to sell as the plankton buy. This kind of data is why I still pay attention to financial infotainment "news". Just like the classic stories of you know its time to sell when your shoeshine boy owns stocks in late 1920s or your hairdresser owns multiple california houses in mid 2000s, if the plankton are being encouraged to go all in, that is a very strong sell signal for those who know how to to listen.

michaelt2• 13 years ago

Is it possible to identify 'plankton' except in hindsight?

VLM4• 13 years ago

Sure. Are financial decisions being made for the plankton by popularized mass media stories instead of analysis of current and historical conditions? Looking at the business cycle and rational buy/sell times, does the possible plankton consistently lag the real world cycle in some cases over 90 degrees? Another analysis is plankton is really small compared to the whales so you can assume a really small player is plankton, although there are the occasional other small animals. Pretty much the mass media sets up bagholders. So if a hypothetical plankton is nodding their head along with the infotainment financial channel newsreader, they're probably plankton. If someone says they made their decision because of Graham and Dodd they're probably not plankton, but if they "blame" Cramer and Kudlow they're total plankton. If they "blame" Middleton probably not plankton but its not entirely settled. If they're nodding their head along with a really apparently smart commissioned salesperson aka "financial advisor" its a plankton-ish indication. Found zerohedge in their web browser history, probably not plankton; found financial advice from hollywood actor twitter feed, probably plankton.

Harry Browne's passive investment strategies continue to make money over the long term. Don't have to have a passive permanent portfolio strategy implemented, but not even knowing such a concept exists is plankton-ish.

Make decisions based on delta value, not plankton, make decisions based on delta price, plankton.

joezydeco• 13 years ago

If that's what 'plankton' are doing, what about the 'muppets'?

sschueller• 13 years ago

There are more 1000 Swiss Frank notes in circulation than ever before. The SNB believes that people using them as an easy way to 'sefaly' hoard large amounts of cash.

http://www.snb.ch/de/iabout/cash/id/cash_circulation

chiph• 13 years ago

In English: http://www.snb.ch/en/iabout/cash/id/cash_circulation

Saving cash in the mattress¹ (or buried in the back yard) is not a hedge against inflation. Could it be for tax avoidance reasons? Is Switzerland one of the countries that taxes savings balances?

¹ the joke here is that that's the "First Savings Bank of Sealy Posturpedic", a large mattress maker.

danielweber2• 13 years ago

People who were born or grew up in the Great Depression were extremely thrifty. As bad as the recession was, a nice silver lining will be more people who aren't borrowed to the hilt.

Fomite4• 13 years ago

Pulling out of the market is troubling though. There's some evidence that younger generations are currently saving enough, but are doing so in low yield instruments. With interest rates like they are, it's impossible to just save enough for retirement. You need that saving to be growing at a reasonably steady clip.

gaius2• 13 years ago

Indeed. Compound interest doesn't help if inflation is compounding faster!

pessimizer• 13 years ago

Edit: that's what I get for not reading - consumer spending only gets a mention at the end. Still an important point to make wrt consumer spending, so I'll leave it here.

http://www.cepr.net/index.php/blogs/beat-the-press/do-people...

"[...I]t is just wrong to imply that consumption is currently depressed. It isn't. The saving rate in the first half of 2013 was less than 4.3 percent. This is less than half of the average saving rate in the 1960s, 1970s, and 1980s. It is lower than the saving rate at any points in the post-war era except the peaks of the stock and housing bubbles. Unless we see a return of a bubble, there is no reason to expect consumption to increase further relative to income."

Just noticed that in 2010, he writes the same thing responding to an article complaining about a 5.8% savings rate. Three years later, with the savings rate decreasing by 1.5% and a complete lack of retirement savings amongst baby-boomers, it's still not enough spending for financial pundits.

http://www.cepr.net/index.php/blogs/beat-the-press/washingto...

tehwalrus2• 13 years ago

This article tell us why government fiscal policy is irrelevant to economies - and why the left/right dichotomy is such utter nonsense.

A crash in confidence in households can pull out trillions of dollars of funds from stocks, and put them into low yield bonds - governments can't come close to this kind of economic effect. The change in consumer behaviour - also ultimately derived from confidence - also has a massive effect.

Similarly, confidence has an effect on businesses - but this appears to have been short term compared to the change in household behaviour in this downturn (according to the article.)

Governments cuts or spending pale in comparison - the economic levers of central bankers and treasury ministers are hardly connected to anything.

PEDANTIC NOTE: I'm not saying governments can't influence economies at all - they can, through laws and regulation of transactions that influence micro behaviour - just that people make such a big deal out of fiscal policy when actually this is nearly irrelevant to how well the economy actually does. Also, obviously, governments that get into too much debt will cause all sorts of problems, but these are mostly the knock-on effects of a crisis of confidence (they may need to use big one-off taxes and the like,) not because spending fast and loose itself damages an economy.

michaelt2• 13 years ago

Many treasury levers could believably work if they were thrown hard enough. I'm sure if you put base rates up to 20% or put another 10 points on sales or income tax you'd see things happen.

There's an additional problem though: if a politician throws a lever too far and over-compensates for a problem they get blamed. But if a politician doesn't throw a lever far enough, the blame stays with the original problem.

tehwalrus2• 13 years ago

I think the bigger problem is when politicians blame each other for what happens to the economy at all...

For example, the coalition in the UK is very fond of blaming the economic crisis on the previous government/ in particular the prime minister Gordon Brown, who was chancellor (finance minister) for many years before that. The problem is that they confuse the blame - arguably, he might be partially responsible for loosening the regulation that allowed mortgages to get out of control, but the new government blames his imprudent spending for the crash - or at least they imply is when they say the solution is to balance the books, whatever the human cost (their cuts are extremely hard on people with disabilities - there are stories of people with cancer/heart disease being ordered back to work, and occasionally dying of shock when they find out. The assessments are carried out by random company staff rather than medics.)

They are also now starting to take the credit for the extremely tentative recovery - which will, if this lack of confidence holds, come back to bite them on the arse sometime soon. If not, it will bite them in 8-10 years when the next crash happens.

I do agree, though, that the levers they had could have an effect if they overuse them - but maybe that would be rather drastic and unpredictable. I think better way to influence behaviour (as I tried to allude to in GP comment) might be to change laws and regulations - this way you can target much more specific aspects of the way micro interactions work, and (subject to the usual unexpected economic hackery) would have a more predictable effect. Maybe.

programminggeek• 13 years ago

If this is true, this is the best trend to happen to the American economy in decades. When people borrow past their means and beyond, they lose their ability to buy things every month because they are so in debt that they spend a huge amount of their income just to pay on debt each month.

That means new home purchases, car purchases, and every day spending like entertainment or food or clothes goes down because at some point you just don't have the money to do those things.

When people free up their cash flow they can actually spend MORE because more of the money is going to actual buying of things and not just servicing debt. Servicing debt doesn't create jobs, it creates risk for the consumer and the bankers financing them. If the consumer loses their job, they could default on their house, credit cards, educational debt, etc.

In short, if our economy is built on debt, especially consumer debt, it is built on a shaky foundation of risk and uncertainty. The debt-based spending isn't real and it costs everybody a lot of money over time.

A reversing of that trend is a good thing.

miahi• 13 years ago

This also means that people spend less until they get to that cash safety. Yes, they will be able to buy things later, but in the meantime they are not, and an economy based on money flow cannot get better until the flow gets bigger.

Also, a few years of saving money will change the spending habits, and there is no way to switch back to spending more money immediately. Nobody will say "hey, I got enough money now, let's go spend!"

The saving need came as a shock when the banks collapsed. The only shocking way to get people back to spending more is winning the lottery, but that's not a group option.

jsymolon• 13 years ago

Yes, it's a good thing however I don't think that it's going to be "reversing" any time soon.

As stated above, the intrinsic problems haven't been addressed at all.

Not sure what the population at retirement age is going to do. My parents are semi-retired e.g. laid (sic) off. My dad is 72 and still looking for work.

Icing on the cake: the stupendous amount of debt owed by college grads.

dimitar• 13 years ago

This is a demand problem, just like the Great Depression. Eventually demand will pick up after obsolescence will mean people would just have to buy new goods to replace the old ones.

However government doesn't need to save at the same time as households in business. It can employ unemployed resources to build public goods and provide public services. The extra spending will create a multiplier effect - when the government spends, someone will spend out of his pocket. The multiplier effect is present empirically when short-term safe asset interest rates are near zero (as is now - the liquidity trap) or if exchange rates are fixed - something that fits well theory as well.

The Economics of Depression are called "Keynesian" - the set of tools, observations and policy proposals that are shown to work when in such a crisis. They are again fashionable with young stars in economics creating new Keynesian-expired models. All of the criticism of this "Depression economics" is usually valid during normal times, but this is an extraordinary event.

The talking heads and politicians never like stimulus - its use implies a different mode of the economy, its much easier to just continue talking as before. Debt isn't an issue, because stimulus from defence spending right before WWII was done with much bigger debt-to-GDP, inhereted from WWI in most countries that did it.

Three countries had a successful stimulus package in the last crisis enacted big - China, South Korea and Germany. The third one has the luxury of being a proponent of austerity after fixing the demand gap the first year.

The United States hasn't had net stimulus. The package was too little to offset the huge spending cuts at state and local level.

If you don't like stimulus a second best idea is to forgive debt when the debtor cannot pay, to increase inflation (hard), and to at least refrain from cutting government spending. No mainstream economic model recommends austerity. The classical types recommend smooth changes in spending, the Keynesian-type fiscal stimulus, the Austrians and other Liquiditionists are a joke.

Structural reforms are intended to improve long-run trend growth. This doesn't matter when you cannot return to the previous path.

the_watcher• 13 years ago

>The Economics of Depression are called "Keynesian" - the set of tools, observations and policy proposals that are shown to work when in such a crisis. They are again fashionable with young stars in economics creating new Keynesian-expired models. All of the criticism of this "Depression economics" is usually valid during normal times, but this is an extraordinary event.

There is an entire (respected) school of economics that disagrees that Keynesian economics works. I'm not here to argue which side is right, since I am not an economist, but to simply state the Keynesian economics are the "Economics of Depression" and then dismiss the Austrians as a "joke" is ridiculous.

>The talking heads and politicians never like stimulus - its use implies a different mode of the economy, its much easier to just continue talking as before. Debt isn't an issue, because stimulus from defence spending right before WWII was done with much bigger debt-to-GDP, inhereted from WWI in most countries that did it.

From what I have seen, this is pretty much the opposite of true. The Democratic Party in the US has been extremely pro-stimulus basically since Obama's election (your point about state level cuts negating its efficacy may be true, but that doesn't mean there isn't a large group of politicians that are pro-stimulus). Most of the talking heads I have seem pretty pro stimulus, and they definitely are anti-austerity.

Families Hoard Cash 5 Years After Crisis

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