"The housing bubble apparently has convinced many in the USA that their house is a huge piggy bank that allows them to borrow more and save less - and thereby generates all that money that will be needed to sustain rapid consumer spending and overall economic growth."
- From: marcelocrisanto@xxxxxxx
- Date: 11 Sep 2005 07:58:39 -0700
Impending Financial Strains in the U.S.A. --
by Gary Shilling --
Another recent study found that personal savings will provide only 10%
to 20% of retirement income, and when pensions and Social Security are
included, the total retirement income will be just 59% of median
current income for working Americans.
Apart from saving out of personal income, investment gains are unlikely
to provide comfortable retirements for many. It's a question of
when, not if, the housing bubble collapses, in my view. Also, in the
mild deflation I foresee, stock returns will average 4% to 5%, assuming
3% dividend yields, a far cry from the 20%-plus in the 1995-1999 era.
After Treasury bonds rally with the advent of deflation, 3% yields will
prevail.
Meanwhile, Social Security benefits will probably become less generous,
given the impending financial strains on the system. And defined
benefit pension funds are being frozen, terminated, converted to less
generous cash balance plans, cut out for younger workers or turned over
to the government's Pension Benefit Guaranty Corp., leaving many
employees to rely principally on 401(k)s that depend on investment
results.
So, Americans will need to finance much more of their retirements the
traditional way-by saving more of their disposable personal income,
but this will be difficult. Only about 70% participate in their
company 401(k) plans and thereby take advantage of company
contributions, even though 64% of employers in 2004 said 401(k)s are
their primary retirement plan. Lower paid employees are especially
absent from participation, with 40% for those making less than $20,000
and 60% for those earnings $20,000 to $40,000, while 90% of employees
earnings $100,000 or more participate.
Despite these financial strains, Americans have yet to run up their
saving rate and run down their debt and debt service levels. Instead,
the housing bubble apparently has convinced many that their house (or
houses since increasing numbers own more than one) is a huge piggy bank
that allows them to borrow more and save less-and thereby generates
all that money that will be needed to sustain rapid consumer spending
and overall economic growth in coming quarters.
So, if my analysis is correct, the key to consumer spending and overall
economic growth is the housing bubble. When it breaks, so will the
economy as construction nosedives and consumers shift to a massive
saving spree and debt repayment, and a serious recession or worse
unfolds. Miserly consumers also will slash imports, to the detriment
of the many nations that rely on Americans to buy their excess goods
and services. With the Chinese economy cooling and headed for
recession, aided by the small revaluation in the yuan, a global
recession will result. Furthermore, a serious break in U.S. house
prices could destroy so much net worth and so disillusion Americans
that the good deflation of excess supply I foresee will instead be the
bad deflation of deficient demand.
When will the all-important housing bubble break? Ah, that's the $64
trillion question. It looks like it's in the blow-off stage that is
typical of the end of a speculation. Still, speculations tend to last
longer and go to greater extremes than imaginable. I'm watching
closely for signs of a bursting in the housing bubble, and suggest you
do too.
.
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