Debt is in vogue these days. From the government budget to Joe Sixpack’s personal finances, there’s no shortage of red ink. The question, of course, is whether the mounting liabilities threaten or are merely a reflection of a wealthy nation indulging in what other economies can only dream of: borrowing to the hilt with no immediate consequences.
Yesterday’s release of the Fed’s third-quarter Flow of Funds report triggered the debate anew. On the surface, at least, all is obvious. Household debt, for instance, climbed by an annual 11.6% rate in the third quarter, the fastest pace since 1987. The Federal government’s penchant for digging itself deeper paled by comparison, rising by a relatively modest 5.1%
For some, such trends are the latest smoking guns for expecting economic and financial turmoil. Joe can’t keep racking up debt forever, goes such thinking. When he finally decides to save, the resulting parsimony will take its toll on the economy, thanks to the fact that the GDP relies on consumer spending to the tune of around 70%.
Of course, such warnings have long fallen on deaf ears, starting with the consumer, who shows a persistent inclination to spend now and pay off debt later. The piper never seems to get paid. But might that soon change?
If any of this talk is designed to conjure images of financial Armageddon, some dismal scientists aren’t biting. Consider, for instance, William Conerly of Conerly Consulting. This economist recently penned an essay titled “What National Savings Crisis?” As he proclaimed in the piece, which he emailed to CS last month, “There is no national savings crisis in America.”
A provocative statement in this day and age, to say the least, and all the more so in light of the updated Flow of Funds data. Wondering if perhaps Conerly’s changed his mind, we called him up with an inquiring agenda. But this consultant wasn’t budging, pointing out that consumer credit debt is actually rising at its slowest pace since 1993, according to another data series tracked by the Fed. “The 12-month growth rate for consumer credit is the lowest since 1993,” Conerly told CS.
So, what accounts for the surge in household debt generally, as reported by the Flow of Funds report? The numbers reveal that mortgages account for the bulk of the ascending red ink among households. Whereas overall household debt jumped at an annual 11.6% rate in the third quarter, mortgage debt rose by 14%. Consumer credit, by contrast, rose by a relatively mild 5.4%. Real estate, in short, is driving the lion’s share of the red ink. That’s different than buy depreciating cars and TVs, of course. But servicing debt, any debt, gets harder if interest rates rise, which they seem to be doing of late.
What are we to make of all this? “We’re paying off our car loans and doing more mortgage debt,” Conerly observed, speaking on behalf of Joe Sixpack and his counterparts.
Conerly concludes that all the talk of crisis is overblown, specifically when it comes to the so-called savings crisis. The government, he asserts, has a less-than-perfect methodology for tracking savings. As he recently wrote in his essay,
The government does not count savings. The statisticians count income earned, and then they compute savings as whatever is left over after taxes and consumer spending. The theory is excellent, so long as income is accurately measured. In practice, however, income is woefully underestimated. We actually have more income than the official statistics show, so we have more savings as well.
Still, he conceded in today’s interview that there’s a “deterioration” in savings, even if it’s miscalculated. But the deterioration isn’t so great as to court disaster, he emphasized.
Conerly’s not alone with that view. Susan Sterne, chief economist of Economic Analysis Associates, wrote an article for Business Economics in the summer that came to a similar conclusion. “Anomalies in the measurement of savings and growing wealth suggest that measured savings rates are not as big a problem as they appear to be,” she opined.
Nonetheless, even an optimist can be excused for being a little wary these days. Conerly suggested to us that if the housing boom bursts, there could be trouble. He also said that businesses need to do more contingency planning in case of future short-term energy-price spikes. In addition, he added that Ben Bernanke, who’ll take over the Fed next year, may not be as deft as Greenspan. “Bernanke’s a good choice, but I don’t expect him to be quite as good on judgment calls,” he predicted, noting that Greenspan had experience in real-world economic consulting whereas Bernanke is a creature of academia. “That raises the risk of money policy errors.”
Nonetheless, Conerly expects economic growth will stay above 3% in 2006. Still, the risk of recession will rise next year, he added, a forecast that probably doesn’t surprise all that many people.