Why I'm Draining My Savings to Stimulate the Economy

valuecreator · Jul 21, 2013

http://finance.yahoo.com/blogs/the-exchange/why-m-draining-savings-stimulate-economy-132919961.html

Why I'm Draining My Savings to Stimulate the Economy

For several years, the economy limped along because of me. I scrimped on everything, did it myself if I could do it myself, and hoarded money out of fear that the recent recession had another dip or two left in it.

Things are different now. I've turned my savings into spending, rung up thousands of dollars' worth of purchases on my credit cards and in the process paid a lot more in taxes. And I'll probably keep spending like this until I nearly run out of money.

In other words, I've bought a house.

Since the recession materialized in 2008, policymakers in Washington have been urging Americans to buy homes, because no single purchase does more to generate economic activity. The housing market and everything associated with it accounts for around one-sixth of the entire economy, which is why a housing bust can drag the whole nation into a recession (basically what happened starting in 2007) while a housing boom can make nearly everyone better off, including people who don't even own homes.

That's why the Federal Reserve has pushed interest rates to historic lows, which makes buying and owning a home more affordable. For buyers like me, the final piece fell into place when home values finally bottomed out last year, after falling between 20% and 40% from the mid-2000s peaks, depending on where you live.

I finally took the bait and bought a home in the suburbs outside New York City a few weeks ago. Now, money I had been saving for years is circulating throughout the economy, helping make companies more profitable and keep workers employed. It's the "paradox of thrift" in reverse: Liquidating my savings may make me more vulnerable to a financial shock, but it's good for the overall economy. That's how America operates. We don't save very much, but that's perverse good news because our whole economy depends on people spending almost everything they earn.

A lot of Americans are beginning to spend money on homes the same way I am. Existing home sales are up sharply from the 2010 low point and are closing in on normal levels, which were about 5.5 million sales per year before they spiked above 7 million during the housing bubble, in 2005. New-home sales are still depressed, but they've ticked up as well. A pickup in housing activity and home values helps explain why the stock market keeps hitting record highs and consumers are gaining confidence, even as government spending cuts hold back the economy. Here are four specific ways I'm providing stimulus:

Buying lots of stuff. I've spent nearly $2,000 at Home Depot (HD) during the last few weeks. I've bought a new dishwasher, an air conditioner, lighting, lawn equipment and more fasteners, light bulbs and packing tape than I can keep track of. Before I bought a house, I might have spent $50 a month on that kind of stuff. No wonder Home Depot's stock is up 30% so far this year.

Supporting local businesses. Before I even moved into my new home, I paid a specialty firm $1,800 to remove some asbestos pipe insulation in the basement and a cleaning service $300 to thoroughly scrub the place down. I've also paid my contractor John Augustyn more than $2,000 so far to install recessed lighting and help with a variety of other jobs. There are other projects I'd like to do if I can afford them, so the money will probably keep flowing into the economy, rather than into my bank account.

Fattening up the banks. As anybody who has ever taken out a mortgage knows, the whole process feels like a huge vacuum latches on to your bank account and starts sucking. I paid Wells Fargo (WFC) an origination fee of $650, plus I'll be paying interest that's about 4 percentage points higher than what Wells pays the depositors whose money makes lending possible. That's a healthy spread that has helped Wells, the nation's largest mortgage lender, turn in strong profits during the last several months.

I also paid around $4,000 in miscellaneous "title charges," which is a frustrating part of buying a home. These services are largely performed by people you never see, largely for the purpose of making sure the paperwork is all in order. Sure, this can prevent costly legal problems down the road, but still, it feels like unseen bureaucrats are simply tacking on charges you have no choice but to pay, like sneaky senators who attach pet projects to must-pass Congressional bills. But title companies are a valid part of the economy, too.

Funding government. The most distressing part of buying a house is the tax bill. I paid nearly $7,000 in mortgage taxes for the privilege of buying a house, and the seller paid nearly $10,000 more in city and state transfer taxes. What's worse is that many people don't anticipate such large sums when they prepare to buy a home, because they forget the government has a big paw in the middle of the transaction.

States and cities need the money. They can't borrow the way Washington can, and many municipalities have been forced to lay off teachers, cops and firefighters on account of lost tax revenue. Still, I can't help feeling I could stimulate the economy a lot better by doing something else with that money.

All told, I could easily end up spending $30,000 this year that would have stayed in the bank if I hadn't bought a home. (That's in addition to the down payment on the house itself.) In a good year, about 7 million Americans buy a new or existing home, while in a bad year it's more like 4 million. If every new home owner spent more or less what I'm spending, that's nearly $100 billion in additional economic activity that occurs in a healthy housing market. And it happens automatically, without votes in Congress, changes in Fed policy or any policy decisions whatsoever.

No wonder the Fed would rather have me stimulate the economy than do so itself.

Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.
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worldbubble · Jul 21, 2013

he bought the house for living not for stimulating an economy ...

for stimulating economy he wrote the article though

valuecreator · Jul 21, 2013

I picked that up on Zero Hedge, under the title Confessions Of A Keynesian Debt Serf.

the comments are worth reading:

http://www.zerohedge.com/news/2013-07-20/confessions-keynesian-debt-serf

sippy_stacker · Jul 21, 2013

Don@Daytradeshow was pretty pissed off about the same article :

[youtube]http://www.youtube.com/watch?v=w4h1_KFCpvg[/youtube]

valuecreator said:

I picked that up on Zero Hedge, under the title Confessions Of A Keynesian Debt Serf.

the comments are worth reading:

http://www.zerohedge.com/news/2013-07-20/confessions-keynesian-debt-serf
Click to expand...

TheEnd · Jul 21, 2013

Well they (the banks) ar'nt getting me on this one......I AM NOT taking on any debt anytime soon that's for sure!

trew · Jul 21, 2013

our whole economy depends on people spending almost everything much more than they earn.
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hawkeye · Jul 21, 2013

I pointed this out first, except I was more concise...

http://forums.silverstackers.com/message-548037.html#p548037

I wouldn't be surprised if it was all made up. It's a bit too ridiculous to be real and could be satire to illustrate how ridiculous the current situation is. Maybe a sarcasm smiley was missing at the end...

EDIT: in fact thinking about it, I'm almost certain it's satire.

JulieW · Jul 21, 2013

In the nineties I was spending every cent I earned to help the economy - or so I thought. Such selflessness I thought. But now I save all I can to help the private debt total drop.

It's a way to practice infinitesimally micro economics.

hiho · Jul 21, 2013

JulieW said:

In the nineties I was spending every cent I earned to help the economy - or so I thought. Such selflessness I thought. But now I save all I can to help the private debt total drop.

It's a way to practice infinitesimally micro economics.
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or Pico economics?

JulieW · Jul 21, 2013

http://www.theage.com.au/money/were-back-in-the-black-20130720-2qas9.html

Australia has been one of the few developed countries to avoid a residential property crash, but that hasn't stopped international ratings agencies and commentators suggesting one is due.

But there are plenty of reasons unique to the Australian market for why that won't happen and why, in fact, we may be headed for a property boom, particularly in NSW and Victoria.

Not least of these is a new trend by Australian borrowers to pay off more of our home loans. This may be for a variety of reasons: for example, some of us have kept our repayment amount the same even when interest rates came down - a neat trick for paying off your home loan much faster - and others have just been much more diligent.

Ever since the GFC, we've changed our mindset and moved towards a savings mentality - we all feel that it's better to save, or pay off debt, than buy that new wardrobe necessity or extravagance.
Advertisement

Steven Munchenberg, the chief executive of the Australian Bankers' Association, believes it's a broad trend. ''People are more cautious about spending and more conscious about their debt,'' he says.

Backing this up, the household saving ratio, as measured by the Australian Bureau of Statistics, has gradually trended upwards and was 10.6 per cent in the March quarter, after falling to as low as 4 per cent during the GFC and minus 2 per cent in 2002.

''Many people are saying they can afford to pay off more, and so they are, and in many ways it's the sensible thing to do,'' Munchenberg says.

In fact, in aggregate, the Reserve Bank has done some calculations (see the table) that show households' mortgage buffers are equivalent to about 20 months of scheduled repayments. What that means is that if any of us got into difficulty, on average we would have 20 months to work our financial situations out before the bank came knocking on our door.

The table is up to March, but the Reserve Bank reports the average mortgage buffer has continued to increase in the past few months, at a slightly slower rate.
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I think it interesting that 2008 seems to have scared the bejesus out of most people I know and most are still in cash in their super and saving what they can.

A bit like how you pay a bit more attention to driving after a near miss - well for a few miles at least.

hawkeye · Jul 21, 2013

Or it could be a case of some guy thinking "haha, this'll rile them up, and then proceed to laugh at people getting outraged".

valuecreator · Jul 21, 2013

[youtube]http://www.youtube.com/watch?v=GqXO5n2Mf3c[/youtube]

errol43 · Jul 21, 2013

JulieW..WhilstI think you are right about paying their home loans as fast as possible but ar they doing it at the expense of their credit cards going up?

Regards Errol 43

petey · Jul 21, 2013

I suspect we will see more and more articles like this - it's borderline "savers are hoarders" and "help your fellow countrymen".

JulieW · Jul 22, 2013

errol43 said:

JulieW..WhilstI think you are right about paying their home loans as fast as possible but ar they doing it at the expense of their credit cards going up?

Regards Errol 43
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Could be Errol but I suspect there's a general 'no spend' mindset.
BTW I just thought - a credit card is a useful thing since if the ATM grid goes down, there is always a signature option!

mmm....shiney! · Jul 22, 2013

JulieW said:

errol43 said:

JulieW..WhilstI think you are right about paying their home loans as fast as possible but ar they doing it at the expense of their credit cards going up?

Regards Errol 43
Click to expand...

Could be Errol but I suspect there's a general 'no spend' mindset.
BTW I just thought - a credit card is a useful thing since if the ATM grid goes down, there is always a signature option!
Click to expand...

Not all merchants have a manual machine.

JulieW · Jul 22, 2013

mmm....shiney! said:

JulieW said:

errol43 said:

JulieW..WhilstI think you are right about paying their home loans as fast as possible but ar they doing it at the expense of their credit cards going up?

Regards Errol 43
Click to expand...

Could be Errol but I suspect there's a general 'no spend' mindset.
BTW I just thought - a credit card is a useful thing since if the ATM grid goes down, there is always a signature option!
Click to expand...

Not all merchants have a manual machine.
Click to expand...

Well those round 50's might come in handy after all!!

Pirocco · Jul 24, 2013

Since saving means producing without spending, the circulating money sees more production and thus increases in purchasing power. So saving itself is stimulating economy. You can buy more for the same.
What governments do with depositors money, is theft that destroys instead of stimulates economy, with the financial system as a whole nothing but organized removal of the obligation to produce and pay back.

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