Stop Saving Now and Spend Those Rebates! The Home Refinancing Well Has Run Dry.

May 12, 2008

I’m not sure at what exact point did “saving” become a four letter word. The predicament that we now find ourselves in has an origin in a decade long spending binge. For many decades in our nation’s history, we were a lender and large exporter to other countries so this is a relatively new phenomenon that we now have to borrow and go into deficits. I find it hard to believe that the market cheers when retail sales come in slightly lower and in another report, we find out that the public is utilizing credit cards at a higher rate to maintain these higher spending levels. What has occurred is the borrowing binge from real estate has now shifted to the last fortress of hope, the plastic credit card. And guess what? Your government doesn’t want you to save! In fact, it seems like policies are being put into place to force you back on the perpetual hamster wheel of spending. Just to give you some proof, let us look at the rate of U.S. Treasury I Savings Bonds:

Saving I Bonds

I bonds are a relatively safe and good addition to any portfolio. They provide a fixed rate of return plus an inflation rate. Or I should say, they used to provide a fixed rate of return. Currently I Bonds are paying 4.84% which includes the abysmal 0% fixed rate. The government here can easily increase the demand for people to save but take a look at the above track record. If anything, they are making it more and more difficult for those looking for safe investments to actually park their money. It is a sad attempt to punish savers and force people out to consume more which has become 72 percent of our GDP. The rebate checks are now hitting bank accounts and only time will tell what kind of impact they will have.

Yet in 2007, they reduced the maximum amount a person can invest in I Bonds from $30,000 a year to $5,000:

“If 98 percent of all annual purchases of savings bonds by individuals are for $5,000 or less, why does the Treasury Department feel it necessary to reduce the amount of savings bonds purchased?

The Treasury press release identifies a desire to get the program back to its roots of serving individuals with small amounts to invest.

It’s hard to argue with that. However, if 98 percent of the purchases already fit that pattern, why bother with the revised standards?”

Actually, there are ways people can get around this by buying both the paper form and the electronic form ($10,000) but the point is that they are making it more complicated for people to save. The logic they give for the reduction is something I do not buy. The roots of saving simply are not in line with what the fixed rate did this month. It is down right maddening how policies are being taken to punish savers. Another reason for this is I Bonds are also linked to the CPI for inflation and have you noticed the price of things recently? It is very likely that if rates spiral out of control and the market starts unwinding further, these guaranteed investments may be very lucrative. And at that point we may find out that they simply discontinued these things altogether.

The employment numbers on Friday weren’t so encouraging either giving us our 4th straight month of employment contraction:

The market ended the day higher simply because the forecast was set for 70,000 job losses and we only got 20,000. This is the world we now live in. The market is simply cheering the fact that estimates weren’t as bad as projected but forget to examine the deeper meaning of this all. If we aren’t in a recession why is it that we are losing jobs?

No More Water in the Well

The absurd amount of mortgage equity withdrawals during this decade went hand and hand with the massive housing bubble. People for the most part used this new found money and pumped it back into the economy. Normally Americans used to keep most of their equity in their home but this psychological shift occurred and we saw marketing ads with messages such as:

“Why let your equity sit in your home and do nothing?”
“Tap the potential of your housing ATM!”

“Refinance and take cash out!”

“Take that trip or buy that new car with your HELOC!”

Here’s the chart to show you the insanity visually:

The amount of money being withdrawn has steadily been declining and now with the credit crunch and prices falling, the well is truly dry. In fact, some lenders are simply reducing home equity lines on customers in certain areas to protect themselves. So much for thinking that money was always going to be there. Given the negative savings rate and the golden goose not pumping out anymore gold, many Americans simply jumped to the final debt product, the credit card. The number is now somewhere near the $1 trillion mark:

“(Fortune Magazine) — This past summer’s subprime meltdown involved about $900 billion in now-suspect securitized debt, reckless lending, and consumers who buckled under the weight of loans they couldn’t afford. Now another link in the consumer debt chain - credit cards - is starting to show signs of strain. And the fear that the $915 billion in U.S. credit card debt (an uncannily similar figure) may blow up has major financial institutions like Citigroup, American Express, and Bank of America strapping on their Kevlar vests.”

This past decade saw Americans spending and avoiding saving because of massive consumption. But looking at this data, it looks like Americans are going to continue on avoiding saving but for another reason; this time many will not save because they simply cannot and have no where else to go. The credit unwinding will continue.

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