Donna Block
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I have a New Year’s confession to make: my husband and I are personally responsible for keeping the world economy ticking over. This small feat has been accomplished by madcap, non- stop spending. You name it, we’re buying it with cash, cheques and credit cards. We are spending in shops, malls and on the Internet.
>From the looks of things we’re not the only ones. Americans, it appears, have become the world-class champion spendthrifts of the millennium. According to United States government statistics, Americans are saving less and spending more than ever.
The danger of all this unbridled buying is that when people spend they tend to stash very little, if anything, away. And when levels of savings are poor, economies tend to be more vulnerable to market fluctuations. If the global economy is going to pull through the tough times ahead, then the US has to remain strong and healthy.
In September and October last year, the US personal savings rate turned negative for the first time since the Great Depression of 1929. Americans are spending $100,20 for every $100 earned.
But experts say the sharp fall in personal savings is not necessarily bad news. The reason is that corporations and the US government, unlike the great unwashed American masses, have managed to stash away cash – and huge amounts of it. For 1998 US business could be looking at record profits and retained earnings close to $1,2-trillion. This performance has helped put the American budget in the black for the first time in 30 years.
This money – called national savings – is what’s being squirrelled away at record levels. So when all the sources of US domestic savings are added up it brings the American national savings rate to 17,4% from 14% six years ago.
Moreover, foreigners are happily investing their savings in the US, so businesses aren’t facing a capital shortage just yet. Last year saw a record net foreign investment of $250- billion, a lot of it from Asia where savers were looking for a “safe haven” to ride out their own countries’ crises.
This combined with the phenomenal rise in stock values has been driving the US spending spree. In fact, US consumers have been letting the stock market “save” for them. The gains they have been making in the market have been ploughed into retail shops. So while US consumers are not saving more, they are earning more.
The US is letting the good times roll. People are employed, their pay packets are rising and they are not threatened by global turmoil.
But – and this is a big but – there is another side to the coin. Consumer debt has been growing and so too has business debt at an alarming rate. Business is hoping to escape the crunch by counting on a continuing strong economy to help make those monthly payments. But forecasts for the 1999 economy are for slower growth, and some economists are already projecting for business debt to grow faster than profits.
Poor profit performance will be scrutinised by the stock market and the end result could be plunging share prices, which in turn could send the whole making-a-killing-on-the-market- and-then-spend-it system into a tailspin. In short, if US consumers are not careful, the bubble could soon burst.
The truth is, Wall Street can’t go up for ever; business and government won’t always be so cash rich; and foreign money may decide to find a new home. So should we be worried? The answer is yes. Not since the 1920s has the stock market played such a pivotal role in a US economic boom. This is what makes the rising business debt and lack of personal savings so troublesome. But nobody seems to be paying much attention.
So, where might we all be if Americans start cutting back on their spendthrift ways? It’s hard to say. There is no doubt US consumers are keeping the global economy afloat. A sudden reversal of the trend would have unpredictable consequences. Notwithstanding, many leading economists are suggesting that Americans should start to save a little, but not too much. They argue that it never hurts to take a little off the table and save it for a rainy day.
I’m going to take their advice.
ENDS