Charles Skelley: Adam Smith’s economic principles can show how to correct the 35-year collapse of US Personal Saving

Various data inside the Grandfather Economic Report indicate that during 2006 the statistically average 2.5-person household in the US is burdened by approximately $409,000 of debt in various forms.

The average household has $123,000 for Financial sector debt (home mortgages to a government agency such as Ginnie Mae or Freddie Mac; plus debt to financing subsidiaries of manufacturers for previously purchased cars, trucks, etc.). The average household also supports another $111,000 in debt for Household Debt (home equity loans, credit cards, etc.). And it owes $15,000 to foreigners. But that amount of debt is still nowhere near enough debt to lift today’s 2.5-person household out of debt-poverty. So the family breadwinner hopes to find a desirable job where the employer helps out by borrowing $78,000 of Business Debt (i.e. corporate debt) to support “working capital” for each US household. The combined Federal, State, and Local governments are helping out by allowing that average 2.5-person household to make payments on $80,000 of Federal Government Debt plus $2,000 of State and Local government Debt. Thus during 2006, the total adds up to approximately $409K of debt being supported by this average 2.5-person household in the US.

The Federal government is doing this to its own people. Total US debt per US household is now increasing by $30K per year. The US today is at the end of a 40 year debt-expansion bubble, which is close to bursting.

Economic principles of Adam Smith are the probably the only way to get out of this debt-bubble in a pleasant way. Smithian economics says the US Federal Government needs to push a truly massive amount of Working Capital into the US economy, so “Productive” workers can support all this debt that should never have been allowed to happen. And the Federal Government’s policy shift needs to start immediately. The US today needs to ramp up its production capacity as fast as Franklin Roosevelt did during World War II. Otherwise the current US debt-expansion bubble will burst

In other countries of the world, the overall debt-to-equity ratio is much lower, much more manageable, and not expanding like a soap bubble.

The Rothchilds of Europe are not causing this.

Fundamentally, the problem is that for the last 35 years in the US, politicians were unwilling to let equity form in the US at least as fast as the debt was expanding. Now the US has not only a massive capital shortage and a manufacturing shortage, but also a huge surplus of debt. Some US Employers are moving to countries which aren’t at the end of a debt-expansion bubble that is ready to collapse. And without good-paying jobs, US people now think they see conspiracies every where.

The accompanying graph of Personal Saving Rate is worth at least a thousand words. The graph shows that the Federal Government has OBVIOUSLY been strangling the US economy since 1972, when the healthy trend of the Personal Savings Rate suddenly became corrupted. It appears that the US needs to manufacture several trillion dollars more products every year to get back to a prosperous US economy. A plausible assumption is that one third of the increased manufacturing revenue might translate into take home pay for US workers with the remainder going for raw materials, energy, pollution control, capital depreciation, government regulation, etc. Therefore, the following graph suggests that the US should be looking to recover perhaps $3.3 Trillion annually of manufacturing capacity, with $1.1 Trillion annually of additional take home pay flowing into US workers paychecks. With $3.3 Trillion more products every year, the US would achieve about 30% increase in US GNP. If we adopt the same “can do” attitude in the US that the Chinese economy displays, then the US could expand our GNP by 30% in one Presidential term (4 years).

Rate of Personal Saving Plunges 114% – a record low in world history – $1.1 trillion per year of personal savings is now missing in US

saving from disposable incomeIf families have less inflation-adjusted income, despite more mothers working, then family personal savings must suffer as a consequence – unless, of course, families reduce their consumption. But, families increased consumption spending and, to cover this, they reduced savings to historic lows and increased household debt to historic highs. Dangerous Trend !!!

The chart at the left shows a 48 year trend of that part of disposable income that has been saved – – called ‘personal savings rate’.

Note: prior to 1970 the rate of personal savings was rising smartly – – despite most families then having but one wage earner while also living without increasing debt ratios.

Then, family incomes stagnated – – and the saving ratio stopped rising as seen in the left chart – – then started falling rapidly – – plummeting since 1992. As of Summer 2007, savings were negative 1.3 percent – an all-time record low!!

Also a record low for any leading global economic power in the modern history of the world, per economist Steven Roach Nov. 2006.

In 2005 consumers drew down savings by over $200 billion compared to the prior year, the biggest dip in savings since record-keeping began in 1929 (Bloomberg). $1.1 Trillion in savings missing in 2005 compared to had savings ratio been as 2 decades ago. (Realized capital gains/losses, if any, are not included, and may slightly mitigate this chart if one wishes to call such savings. Nevertheless, the trend with and without is at an all-time record low).

(reference: )


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