Years of Poems and Spirits

Got this slide from Jennifer’s class.

From my finance class, it is apparent that pension funds are a major source of investment (Brealey and Myers (6th edition), p. 409, as cited in Jennifer’s class slides class18.ppt) But Karma is equally adamant that household saving rate is negative. If saving is income minus consumption, then how come these two facts reconcile? Or is saving income minus consumption AND debt payment?

I did some research and hit a recent speech by William Poole. This is perhaps the most comprehensive explanation I have read so far.

His summary points: no worries. The savings picture is not as bleak as media suggest.
My take-aways: Time and money are the atoms of financial universe. In this case, saving is a flow and savings is a stock. Is it possible that the flow contribution is deteriorating but somehow the total stock is still growing? Humm…
BTW, check out Figure 2.

Some quotes/notes:
Are there signs of distress all around, as there were 73 years ago? Has there been a tremendous surge of bankruptcies? Has the United States become a nation of profligate spenders? Are the data wrong? Are the data screwy? My answers to these five questions are no, no, no, no and no.

I begin with the critical distinction between saving and savings… Saving is the flow of after-tax income not consumed… Savings, with the “s” on the end, is the stock of wealth you have accumulated.

The underlying data of the headline news are mostly derived from our National Income and Product Accounts—the NIPA.

The NIPA focus on both expenditure and income flows has the potential to create accounting discrepancies because the data are collected from different data sources… 2-3 percent“statistical discrepancy.” [However], the measurement errors do not seem to be changing enough over time to account for the change in the saving rate.

Personal income goes to households and includes wages, salaries, rents, royalties, dividends and interest.All transactions involving exchange of existing assets, however, are excluded from measured income.
–Therefore, investment income and/or profits from selling a 2nd house is NOT included?

Thus, capital gains income is not counted, but tax paid as a result of realized capital gains is counted. … A company can throw off cash to investors either through paying dividends, …, or through share repurchases.

The NIPA treat contributions to defined contribution pension plans, whether made by employees or by employers on their behalf, as disposable personal income at the time such contributions are made.
–OK, that means savings should be recognized at that point.

Payments from such funds are not counted as current income, but treated as an exchange of one financial asset. … While not completely clear, … payments from such funds are not counted as current income, but treated as an exchange of one financial asset. … [However,] Experiments with these adjustments show that the impact on the measured saving rate is minor, in part because of the decreasing importance of defined benefit pensions in the private sector in recent decades.
–Assuming the stock of pension money is large for historical reasons.

income from nontaxable incentive stock options does not get included in personal income.
–Shouldn’t matter other than in a few areas.

On accounting method for durable goods: If cars, for example, were treated like a house in the NIPA, the consumption entry would be imputed transportation services, including depreciation, from cars rather than the amount spent on the car itself at time of purchase.
–Unless all of sudden there is a dramatic and sustained increase of durable goods …

In this framework, the principal determinant of consumption is not current personal disposable income, but rather household net worth… Ando and Modigliani show that this theoretical framework
–OK, saving doesn’t matter but is savings in a better shape? But wait …

… household saving behavior does not seem to have changed in any fundamental way. What has changed to a degree is the trend in asset values. Households have consumed some of the increase in asset values in about the same way they always have.
–Well, he is saying that savings matter more than saving rate because it accounts for asset value changes. That is also why current saving rate measurement cannot capture this trend because it is a flow by flow measurement. Humm … makes sense to me.

The mean real growth of household net worth from 1929 through 1958 is 3.0 percent. The mean real growth of the Flow of Funds measure of household net worth from 1946 through 2005 is 3.6 percent. Again, the data are consistent with the broad implications of the received economic theory on the determinants of aggregate consumption.

There is not uniform agreement among economists that increases in net worth generated by capital gains should be considered saving.

Evidence from panel data of households also supports the conclusion that the decline in the personal saving rate since 1984 is largely a consequence of capital gains on corporate equities.
–Time and money: the atoms of financial universe.

Declining real interest rates increase asset values.
–I remember during his on-campus lecture, he answered by saying that if you rent out an apartment, you need to generate $1000 a month. When interest rate is low, the property has to appreciate. Arbitrage opportunity? It is one of those simple questions that one don’t know whether it has a simple answer or not … damn.