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Bruce,
...... When they bought this house, it cost
less than $10,000, but it's now worth over $450,000. They've recently
considered selling their house and using the proceeds to buy a
$150,000 condo in Florida. What would they do with the remaining
$300,000 (after taxes)? That's right, it would go right into the US
stock and bond market.
So lets say I have a house which cost me 10000$ bought 1970. Now I
sell this house to you for a 1.000.000. And since you don't have the
million your must borrow it.
And now you want to tell me that I SAVED 950.000 dollars because now
I can put the money into the same bank that you borrowed the money
from ?
ASSET INFLATION IS NOT SAVING.
I can agree with you that the calculation of savings ratio might not
be correct - but this doesn't change the fact that it is on a record
low not just relative to other countries but HISTORICALLY to America
itself and according to WHATEVER calculation method you take.
I think you guys over there have removed yourselves a bit from
reality. Or as a stockbroker friend of mine was claiming: "The
American market will go up as long as they don't find
anything from Greenspan on that skirt."
Gerrit
> One of the favorite statistics cited by the gloom-and-doom crowd as
> to why the US economy and stock market are in peril is our national
> savings rate. According to the "official" figures, this rate for the
> US has fallen below 4%, and is significantly below the rate of other
> industrialized nations.
>
> The pessimists believe this is a sign that Americans have become
> irresponsible, that we're living for today and not planning
> financially for tomorrow. This spendthrift attitude supposedly
> leaves us dependent on foreign capital, and if and when that capital
> flows out, the US economy won't be able to compete, and disaster
> will follow. To the extent this supposed problem is related to
> foreign capital and the trade deficit, I'll discuss in a future
> post. The important thing to know for now is that there is no US
> savings crisis, there never was, and there most likely never will
> be.
>
> To understand how this myth has been created you first must
> understand how the savings rate is calculated. In its "most
> simplest" form, the savings rate is calculated by taking the
> national income and subtracting personal spending and public
> spending. For John Doe, this means his personal savings rate is his
> annual income minus what he spends and what the government takes out
> of his paycheck. Although there are several other variables
> involved, the most important one that negatively impacts the US
> savings rate is capital gains. In calculating the savings rate, NO
> CAPITAL GAINS ARE INCLUDED. This has a significantly negative
> impact on our savings rate relative to other countries, especially
> as it pertains to real estate. The easiest way to understand this
> is through an example.
>
> I have an Aunt and Uncle who have lived in the same house in Garden
> City, Long Island for over 40 years. When they bought this house,
> it cost less than $10,000, but it's now worth over $450,000.
> They've recently considered selling their house and using the
> proceeds to buy a $150,000 condo in Florida. What would they do
> with the remaining $300,000 (after taxes)? That's right, it would go
> right into the US stock and bond market.
>
> However, in the eyes of the statisticians, only $10,000 of this
> $300,000 profit (capital gain) is savings, because that's all they
> originally paid for the house! As far as the government is
> concerned, the other $290,000 doesn't even exist. Although
> measuring this negative bias is difficult, this non-counting of
> consumer real estate gains is profound, and as more and more baby
> boomers sell their "family" house and buy their "retirement" house,
> more and more of this uncounted savings is going to be unleashed on
> the US financial markets.
>
> The simple truth is US citizens are being "punished" in the official
> savings rate calculations because they've made the intelligent,
> rational decision to use residential real estate as an investment-
> an investment that has a better and more stable long term track
> record than any other. The US and Australia have very low savings
> rates (according to the "experts") among industrialized countries.
> What do these two countries have in common? They have among the
> highest rates of home ownership. Japan has one of the largest
> savings rates among advanced nations. It also has one of the LOWEST
> rates of home ownership. Are these facts just coincidences?
> Hardly.
>
> The capital gains exclusion penalizes Americans in another way
> relative to the savings rate calculations. The exclusion of long
> term capital gains from real estate is nothing short of ridiculous,
> especially when it's track record is considered. Capital gains from
> stocks are another story. However, unless you've been living in a
> cave for the past several years, you know the value of the US stock
> market has skyrocketed recently. The reason this has actually had a
> negative effect on the US savings rate in its current calculation is
> because TAXES on capital gains ARE being included in the
> calculations! Here's an example to clarify.
>
> Suppose John Doe bought 100 shares of Dell a few years ago at $10
> per share. Because of recent volatility, he has decided to sell 50
> shares at $110 each and move that money into bonds. Since he only
> paid $10 per share, he's now going to owe taxes on a $5,000 capital
> gain on these 50 shares he's selling. Let's also assume John's
> income and personal spending haven't changed at all since he first
> bought the Dell stock. This means that in the eyes of the
> government, John's personal savings rate has gone DOWN, because the
> gains from the Dell stock aren't included in his personal savings
> rate, but THE TAXES ON THE CAPITAL GAIN ARE. Remember, savings
> equals income minus spending minus taxes (including capital gains
> taxes). Since his taxes have gone up, but his personal income and
> spending remained the same, his savings rate went down!
>
> We could argue all day whether capital gains from stocks should be
> included in the savings rate. I personally feel at least a certain
> percentage of them should be, but that's beside the point. If NONE
> of the gains from stocks are going to be included, then certainly
> NONE of the TAXES on those gains should be included. They should at
> least be counted as offsetting, that's just common sense (but then
> again, we are talking about the federal government here).
>
> Don't plan on this lack of judgment being corrected anytime soon.
> In fact, the Bureau of Economic Analysis (BEA), which calculates the
> savings rate for the government, recently made the problem WORSE.
> Up until now, mutual fund distributions HAVE been included in the
> savings rate, as dividend income. The BEA has now decided to
> classify these distributions as capital gains, and therefore not
> count them towards people's income when determining the savings
> rate. The result- the savings rate declines once again, even though
> nothing has changed other than the BEA's accounting procedure...
>
> Still not feeling better? Don't worry there's more good news.
> Saving money "for saving's sake" may be a good rule to teach your
> children, but in looking at the savings rate, it's important to
> remember WHY saving money is important for a nation. When this is
> done, the US shines once again.
>
> Savings are important for a nation because financial capital is the
> fuel of any modern economy. The business sector needs access to
> capital to fuel research, development, and expansion. The cheaper
> the capital (as measured by interest rates) the better. The greater
> the amount of savings, the more productive its workforce will
> become, the more the economy will therefore grow, and the more
> standards of living will therefore increase. This is all very true,
> but it ignores HOW EFFECTIVE a country is or isn't at investing its
> capital. In other words, the savings rate pessimists simply assume
> a dollar saved in the US is the same as a dollar saved in Japan, or
> in any other industrialized nation. This is simply not true.
>
> To put it simply, nowhere in the world does capital flow more freely
> and efficiently to the sectors of the economy where that capital
> will be most effectively implemented than in the US. Just as
> importantly, nowhere in the world does capital STOP FLOWING to
> companies that no longer deserve it. This is the biggest downfall of
> our competitors, they simply have enormous trouble letting companies
> fail (which causes temporary pain like unemployment). The capital
> used to support these ailing companies soaks up precious resources
> that "winning" companies need to expand and thrive. In other words,
> a dollar of savings in the US is much more valuable than a dollar of
> savings in other countries because we get a much better return on
> each dollar invested. Therefore, when you compare our savings rate
> in absolute terms to that of other countries, you're comparing
> apples to oranges.
>
> I'm not saying an increase in our savings rate would be bad, it
> almost certainly would be a positive, but it's dangerous to simply
> say saving money is always good. If you want to see an example of
> what can happen to an economy that saves too much and spends too
> little, just look at Japan. Although there are several reasons
> behind Japan's current predicament, over- saving is one of the
> biggest.
>
> The Japanese government (through tax, financing, and trade policies)
> gave their citizens an enormous incentive to save and enormous
> incentives NOT to spend. They also gave their corporations an
> enormous incentive to invest, primarily through expansion (very
> favorable depreciation schedules). While US companies were busy
> investing in information technology to make their factories more
> efficient, the Japanese were busy building more factories. The
> problem was there weren't enough active consumers to consume
> everything that was being produced, and a meltdown occurred. They
> avoided this problem for a long time by exporting the surplus, but
> eventually even that wasn't enough to absorb the production glut.
> Japan clearly saved and invested more than the US in the eighties,
> but who invested their money more wisely, and left enough money in
> the hands of consumers to reap the benefits of those investment
> dollars?
>
> If all this wasn't enough good news, the future of the US savings
> rate is even brighter. With every passing day, it's becoming
> clearer that the US Social Security system is going to eventually be
> privatized (this may be wishful thinking on my part, but bear with
> me for a moment...). This is going to have a huge impact on the
> "official" savings rate calculation. The logic is pretty simple.
>
> In its current form, we all know the Social Security is essentially
> a Ponzi scheme. No money is actually being saved, it simply comes
> in and goes right back out. Since this is therefore currently a
> tax, it actually appears as a "negative" right now on the savings
> rate ledger. However, if the system is privatized, over time it
> would become a "true" savings vehicle (albeit a "forced" savings
> vehicle). And would therefore qualify as "savings" under the current
> calculation scheme. Even if everything else stays the same, this
> one change will add at least ten percentage points to the "official"
> US savings rate.
>
> If you include a privatization of the Social Security system,
> include capital gains from real estate, and REMOVE the capital gains
> tax on other assets, it's entirely possible that the US will have
> the LARGEST SAVINGS RATE OF ANY INDUSTRIALIZED NATION IN THE 21ST
> CENTURY. Of course, then the pessimists will say "remember Japan in
> the late eighties..."
>
> Bruce
>
>
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