The rational decision by American consumers to finally live well within their means will have huge long-term implications for the world economy. The US savings rate (as a proportion of income) averaged 8% from 1950-1990, spiking to almost 12% in recessionary periods, not dissimilar to levels still common in many advanced economies in Asia and Europe where credit was never deregulated to the same extreme degree as in the US and social inhibitions on accumulating personal debt remain strong. A dramatic and relentless decline began by the end of the 1980's (which coincided with an acceleration in private sector leverage as financial deregulation took hold) until the savings rate slumped to negative in 2005/6.
The latest official data for November show the savings rate rose to 2.8%, and I think that given the huge destruction of other implicit 'savings' in the form of equity in housing and pension plans, this is just the beginning of a fundamental cultural shift that will see rates hit 7-8% by end 2010, the sharpest reversal in 70 years. This has huge implications for everything from funding the US fiscal deficit (which looks a lot easier as retail investors and banks hoover up Treasuries) to trade flows (consumer exports to the US are now in structural decline and industrial overcapacity in Asia looks chronic). At say a 7% savings rate, about $1trn of potential consumption is diverted into deposit assets (who said banking is a dead industry?) which puts the TARP numbers in perspective. For Asian exporters in particular, this will be a disaster unless they rapidly restructure their economies. China, as I've forecast many times before, is facing the implosion of its export and investment led growth model , as US savings (and the trade deficit) revert to levels not seen for two decades. So what are the economic and investment implications of this cultural shift in behaviour?
1. Any stimulus plans need to be commensurately bigger as a % of GDP to compensate for the decline in private consumption; even the $850bn now being mooted may not be enough. The US starts to look more like China in a way, with private savings generating low returns diverted to government managed strategic infrastructure/national development projects.
2. The much hyped funding crisis for the Treasury market may at least be postponed, as foreign buyers abandoning US assets (partly because they simply won't have surplus dollars to recycle from trade) will be offset by domestic savings, although the balance between those forces remains to be seen.
3. Consumer discretionary areas of the US economy will remain in structural decline, as will associated equity exposure; the huge growth in retail space per capita for instance in recent decades suggests many malls will be gaudy mausoleums in coming years.
4. The Tsunami of fresh cash will seek conservative, transparent investments offering premium yield, and endorses a strategy of focusing on AAA corporate debt and preferred stock, munis (once we are sure the Obama administration is willing to underwrite soaring city and state deficits) and high-yielding defensive equity exposure in areas like energy and healthcare.
