Liquidity Conflict in the U.S. Economy – Spenders vs. Savers

September 25, 2008 by  
Filed under Economics, Loans and Borrowing, Spending

The Credit System is on Life Support

There was another round of dire warnings issued from Washington yesterday, capped off by a somber speech from President Bush.  The fundamental message is consistent:  The credit markets are clogged.  There is not enough flow of money from lenders to borrowers to support economic growth.  

You might conclude from this message and the repeated warnings that overall, there is a cash shortage among U.S. citizens.  In other words, the government is telling us that people need to spend to drive our economy forward.  OK, I understand that part.  But are we also to assume from this message that there is not enough money hanging around to be spent; that credit flows must be the source of that spending?  Well, the government messengers might want us to think that.  But it’s not really true. 

U.S. Consumers Have Cash to Spend 

I read an interesting article from Forbes yesterday titled “Cash is King“.  The data from the article surprised Mr. ToughMoneyLove. 

Using statistics from the Federal Reserve, the authors reported the following: 

American households have $7.4 trillion in checking, savings and other bank accounts and money market funds. They have another $4.1 trillion stashed in Treasuries and other bonds.  That $11.5 trillion, up from $8.9 trillion (in constant dollars) in 2000, is nearly enough to buy every company in the Wilshire 5000. It’s more than enough to pay off every home mortgage.

Indeed, according to the Federal Reserve data, cash accumulated by U.S. households rose steadily through the 1990’s and reached record highs in 2007, although it has fallen off slightly in 2008.  The hard truth is that there is plenty of cash to spend. 

The Cash is Concentrated in the Hands of the Savers 

The “problem” is that this mountain of cash is concentrated in the hands of U.S. households who are not the spenders.  As I have written about previously, government policy has favored spenders over savers.  The government is not saying anything about this cash accumulation data.  The government wants us to think that there is a lack of liquidity in the economy and that all of us – savers included – are victims of the clogged credit system.  I don’t think that’s necessarily the case.  What is true is that U.S. economic growth has been overly dependent on the excessive spending habits of a large but concentrated group of U.S. consumers – the “spenders” that Mr. ToughMoneyLove has talked so much about.  

What is also likely true is that the economic uncertainty created by the reckless actions of the “spenders” has caused the savers to reduce their own consumption.  In other words, the overdependence by our economy on the bad habits of the worst spenders has frightened the rest of us to a point where we choose to spend less as a precautionary measure.  The government reaction to that is to find a way to get more money into the hands of those with a propensity to spend all of their cash, regardless of economic conditions.  How do they do that?  Unclog the credit pipeline. 

Will the Savers be Blamed? 

I am somewhat surprised that the savers are not being openly blamed for this crisis.  The government could try to turn the cashless spenders against the rest of us.  If a recession sets in, the government might point to our accumulated cash and tell us that we need to do our part in solving this crisis by spending more and saving less. 

Mr. ToughMoneyLove already has an answer:  Not going to happen.  So sue me.

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3 Responses to “Liquidity Conflict in the U.S. Economy – Spenders vs. Savers”
  1. I can envision a series of prime time TV commercials begging savers to spend – similar to the “please travel” commercials just after 9/11.

    Get out there and spend, spend, spend! Save our economy by going into debt like the rest of us.

  2. So much has happened in the last two weeks that it’s hard to digest all this news. To have a financial meltdown during a presidential primary creates information overload. I’m concerned that this bailout is just a temporary band aid and that more fallout is in store for our economy. Next we will be asked to buy “war bond” type savings bonds and help support our financial companies. This bailout is going to be hard for many good “savers” to digest.

  3. @Matt: The government economists need to fine tune the system to strike a balance between the savers and spenders. Although this may slow the growth of GDP in the short run, it will put the economy on a more stable footing.

    @Scott: What is ironic about your comment is that I was a steady investor in government I-Bonds until 2007. Why did I stop? The government reduced the annual purchase limit from $30k to $5k and cut the fixed interest rate to 0%. Some encouragement.

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