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