Full Faith and Credit

As an entrepreneur I like to know which way the wind is blowing. Having heard alot lately about the era of frugality, I thought I'd look into it myself. Fortunately, all the data you can eat about our economy is merely a mouse-click away, which is a good thing given that journalism is dying.

A starting point is the personal savings rate data, courtesy of the commerce department. The trend from the mid-80s right up to the credit crunch was steadily decreasing personal savings rate, which actually dipped negative briefly. Recently it has shot up, although it's a bit difficult to see on this graph. The last few monthly data points are 0.8, 1.4, 2.6, 3.0, 3.8, 4.4, and 4.2. That basically puts us back to where we were in the mid-1990s and well below the savings rate of the 1980s (who knew the decade of greed was so virtuous?). In absolute terms it's not that shocking, although the rate of change has caused alarm.

Desperate to avoid a paradox of thrift, the federal government has stepped in and started spending like a drunken sailor. The US government can really hold its liquor, actually, since with the US debt data from Wikipedia it is easy to see that this is business as usual, except for a brief period of fiscal responsibility in the second half of the Clinton administration. (I've applied the GDP deflator to the data to attempt to normalize the dollar to the year 2000).

So Americans save more individually and the government borrows more collectively; that's the Keynsian playbook, at least for the last 6 months. Prior to the last 6 months, however, we were borrowing heavily at the Federal level and not saving personally, so naturally interest rates increased due to the lack of supply of savings, right? Wrong. Witness the yield on the 30 year treasury bill during this period (that gap in the graph is from when the 30 year was temporarily discontinued).

As Americans saved less and less, the cost of borrowing for the government plummeted (or perhaps the converse?). Here's the treasury yield parametrically plotted against the personal savings rate (the quadratic fit is just phenomenological eye-candy). I colored the most recent data point red just to emphasize this trend has been broken.

Basically foreign liquidity rushed in to fill the gap; while oil-exporting countries would be a reasonable guess as to the source of funds, Asian countries are a larger factor, specifically Japan and China. This global imbalance is at the heart of the financial crisis, leading to basic questions such as: why are developing nations saving so much, and why are they investing their savings abroad?

In any event the future, just like with oil, it is less about the United States and more about the developing world. Arguably, the past two decades were the era of frugality, in a global sense. Previously individual Americans could tap into the global flood of liquidity via instruments such as sub-prime mortgage backed securities, but investors are no longer biting. Currently, however, they are willing to loan to the country collectively (i.e., the federal government). In Q4 2008, investors were literally paying the federal government to hold their money for them. Under these conditions it makes perverse sense for the federal government to borrow heavily. For instance, scaling each year's federal deficit from above by the treasury bill rates over that interval yields something I call the "interest load" (not a standard term).

This indicates that interest rates are so low that even with record budget deficits we will have historically reasonable interest rate payments. Obviously, that could change fast if investors no longer find our federal government a good investment.

If the global era of frugality continues, however, all of us together can borrow much more cheaply than any of us can individually: how best to exploit that? We could arbitrage it directly and have the federal government issue credit cards or offer debt consolidation services (the Obama housing plan bears some resemblance to the latter). Humor aside, retail therapy has a low multiplier value, so the government is going to focus on social services and infrastructure spending.

I implicitly promised a weather forecast at the beginning of this post, so here it is. The global era of frugality will persist in the near term due to inertia, delegating the problem of spending to the US federal government; thus sectors related to public-sector spending will be hot. Americans were defying gravity in the mid-2000s so the personal savings rate cannot go down; but given that standard investment vehicles will be giving tepid returns Americans will not return to mid-1980s savings levels. In this environment the recovery will be soft, the labor market less strong, and taxes higher; therefore I like ideas related to minipreneurship. Etsy-like platforms offer a way to supplement the income of a formerly dual-income (or comfortably retired) household in a work-life balance compatible way for the seller, and offer a low-cost way to achieve a unique retail therapy experience for the buyer. Unfortunately all my ideas for Etsy-style platforms are frustrated by government regulation, but that's a topic for another post.