its all about the balance sheet, baby


This is about the American economy and a plea for all of us to quit bitching about how the government is the fault for all our economic woes.

Yeah, sure, the government could (and should) take some actions to help … and improve their own balance sheet.

But. The combination of the US population (people) and corporations have more money on their balance sheets at their disposal than the government (therefore can make a bigger impact).



Its all about the balance sheet baby.

What do I mean? Savings & cash.

And I mean we are finally heading in the right direction (so quit looking at unemployment and government balance sheet for a moment).

Overall households have increased their % of hhld savings as a percentage of disposable income.

I won’t get the numbers right but suffice it to say people are improving their household balance sheets.


Corporations are flush with cash. As they have become more conservative and banking money for the future their balance sheets have become quite healthy with cash.

These are indicators of good things in the future.

Oh. And before I get to the crux of the consumer/corporate balance sheet dilemma let me share one quick factoid about US debt, their own balance sheet and how we make money (as a country).

I share this factoid slide from a presentation because, I admit, I do get a little tired of how Michelle Bachman and lots of other people so casually focus on debt:


(this comes from an Economic Summit presentation in London)

US is a Giant Investment Bank

– The Asian Savings Glut enabled the US household to “Borrow” money cheaply from savers looking for Capital Preservation and Security and then “lend it back” as risk capital

– If you borrow $100 at 4% over 7 years and set aside $28 to pay the interest, you can then buy “equity” in emerging markets with the remaining $72

– If this “only” produces 10% pa, then over the life of the bond you have doubled your equity capital, you now have $144 after interest, and $44 after principal

– Traditional balance sheet measures such as debt to GDP ignore the asset side of the equation, while liquidity measures such as debt service to income ignore the different nature of equity (capital growth)

– Traditional economic measures fail to capture the real balance sheet and cash flow situation and declare this to be an “Imbalance”

–          A slide from Economic Symposium London march 2011


I shared that just so I could get beyond the country’s balance sheet discussion and get to what you & I can do and should do.


On to us consumers … and what we can do to insure some economic growth in the future.

Its about the savings.

Uh oh.

I didn’t say spending (which spurs the economic outlook).

Yeah. Its true that the economy demands increased consumer spending. The problem is that millions of lower- and middle-income households have lost their capacity to spend – in actual dollars as well as mentally ‘scared’ to spend even if they have the dollars.

Despite the growth in savings as a percentage there is an overall lack of savings ‘safety net’ and a level of debt (even if it is small) that hovers like a gargoyle looking over most people’s shoulder. Although it would be helpful if affluent households spent more, we shouldn’t be calling upon a struggling majority to do so. In the long run, the health of the economy depends on the financial stability of our households.

Therefore we need to reduce our own debt on the balance sheets. Oh. In addition we (the people) need to become less dependent upon social security as “the” retirement fund (I will get back to that point).

Attitudinally it appears like we are making the needed shifts.

In the second quarter of 2009 households put away 7 percent of disposable income, compared with under 2 percent in the third quarter of 2007. Yet the savings rate is falling again, down to 5.3 percent in December.

(note: I added that last point because that is our biggest issue … changing long term behavior and our desire to want to spend versus save)

According to a Harris Poll (maybe in 2010?) 27 percent of Americans have no personal savings and 34 percent have no retirement savings, an increase from over a year ago.

Here is the tricky part.

US consumers want to reduce their debt, but the economy’s recovery depends on their spending. By some estimates, de­leveraging is happening more because of defaults than because of people opting to pay down their debts. A decline in credit-card debt, for example, closely tracks the rate at which banks are charging off delinquent card loans.

In addition job losses are leading to foreclosure or bankruptcy. In others, borrowing has stalled because card issuers have reduced credit limits or raised interest rates.

Think about this …

These are all “forced” balance sheet improvement behavior patterns.

These are not “choice” behavior changes.

That is a point I am making so that we don’t get fooled by numbers …. but rather focus on behavior.

Any behavioral model will show you that forced behavior creates only short term behavior change. And that is why many Media & Economic reporting information is flawed and misleading to the general public.

Yes. Once again I will point out there are some encouraging signs which we should nurture.

The cost of debt payments as a share of personal disposable income, has fallen to around 12 percent, from nearly 14 percent when the recession began. But that overall figure masks wide disparities – millions of households have no debt at all, while others are deep in debt (go back to my “the Two Americas PewResearch post).


By looking only at numbers it appears the trend is moving in a positive direction.

But (and this is a big but) …. we need a change in attitude (which will create the behavior necessary to make it all work).

American people are addicted to spending (this is probably an entire post all in itself on breaking down the addiction culturally).

But let’s instead think about some things.

Americans definitely spend more than people in western Europe and Asia.  Definitely. Its part of our DNA.

You can look at consumption levels and control for purchasing power over the last several decades, and America is simply in a league of its own. The only people who come close are people in Britain, but they are about 85 percent of the level of American consumption. Germans, French and others are in the 70 percent range, Japanese even a little lower. So Americans spend like no one else.”

So what can help us become better savers.

I guess I think about this like any addiction.

It has to be part personal responsibility and part ‘system’ (a system that enables us for success).

I think we need to improve the access of lower-income households to savings institutions.

We just saw Bank of America and other banks trying to charge an extra fee on people with debit cards, particularly with low minimum balances. That tends to discourage people especially among lower-income households.

We need to remember about 25 percent of lower income America is unbanked (they don’t have bank accounts).



Similar to Europe we need to incentivize banks to create small savers accounts. They have a low or minimum balance, that have no fees, and pay a recognizable interest rate. These can be subsidized by government working with banks (and that, my friends, is a good use of government spending).


we need to revise our tax laws.  There are too many tax exempt advantages incentivizing borrowing. We need to incent saving.


Learn from others.

We can learn from societies that promote a more balanced approach to saving and spending.

Few Americans appreciate that the prosperous economies of western and northern Europe are among the world’s greatest savers. Over the past three decades, Germany, France, Austria and Belgium have maintained household saving rates between 10 and 13 percent, and rates in Sweden recently soared to 13 percent. By contrast, saving rates in the United States dropped to nearly zero by 2005; they rose above 5 percent after the 2008 crisis but have recently fallen below 4 percent.

Unlike the United States, the thrifty societies of Europe have long histories of encouraging the broad populace to save.

During the 19th century, European reformers and governments became preoccupied with creating more frugal citizens. They focused on creating hundreds of savings banks that enabled the majority (pretty much anyone) to save by accepting small deposits. Central governments established accessible postal savings banks where small savers could bank at any post office. In addition, to encourage thrifty habits in the young, governments also instituted school savings banks.

All these actions fostered a culture of saving that endures today in many countries (and fosters a certain type of economy). For example … the French government attracts millions of lower-income and young savers with its Livret A account available at savings banks, postal savings banks and all other banks. This small savers’ account is tax free, requires only a tiny minimum balance, and commonly pays above-market interest rates. And in German cities, one cannot turn the corner without coming upon one of the popular savings banks, called Sparkassen.

Legally charged with encouraging an overall savings mentality these banks offer no-fee accounts for the young and sponsor financial education in the schools.

Ok. And while we may not have all those governmental driven opportunities here (and want to use that as an excuse) we need to get in our heads that even with the economy we can save. Even with reduced income we can save.

We only have to look to Africa, where millions who have just risen above the poverty level, have created savings accounts despite the fact their disposable income does not permit any luxury.

In addition, many foreign countries have also restrained the expansion of consumer and housing credit with the intent to minimize being personally over-in-debt. Home equity loans are rare in Germany, and Belgians, Italians and Germans are rarely offered an American-style credit card that allows the user to carry an unpaid balance.



Savings & retirement.

Your retirement isn’t about social security.

When Social Security came about in the 1930s, it was largely a program to keep families from starving and from going absolutely broke.  It was never intended as a long-term benefits program.  Yet life expectancy has increased over time and now today, many Americans depend on Social Security as their primary source of retirement. We need to change our ‘entitlement’ attitude on this.

That’s it for today.

At the end of the day, someone, somewhere in America has to save. In fact a lot of someones somewhere have to save.

Save a lot, save a little …. just save.

And, remember, it’s all in your head. Because if an African earning 5,000 dollars a year can figure out how to save money I imagine we can figure out how to set aside some money.

Written by Bruce