The Personal Savings Rate
O. Max Gardner III

The Personal Savings Rate, as defined by the Bureau of Economic Analysis of the US Dept. of Commerce, is what is left over from personal income after subtracting personal taxes, social security, Medicare, and personal outlays for food, clothing, housing, transportation, etc. Personal income includes wages, dividends, interest, and rental income. The decline in the PSR over the last 15 years is pretty amazing: in 1990, the PSR rate was almost 8%; by 2004, the PSR had dropped to 1%; and last year the PRS was -1.0%. You may wonder how this could be a negative number. The PSR is the average rate so if 5 people save $5,000.00 per person per year and one person takes $25,000 out of their savings then the average PSR rate for these 6 people is 0. These figures indicate to me that we are on the verge of a major depression.

The second group of numbers that recently caught my attention was the annual amount of Household Debt as a percentage of Disposable Income. In 1990, total Household Debt was 80% of Disposable Income. By 2004, total Household Debt was 110% of Disposable Income and it is projected to reach 130% by 2008. This is bad news at best because the Japanese economy had a 130% of Disposable Income Rate in the 1980's just before entering their long and continuing recession. However, at that time the Japanese had a Personal Savings Rate of 11%. This is not a good sign for the US economy where the PRS is already in the minus numbers and going down.

The historical fact is that as debt continues to grow so do the number of consumer bankruptcy cases. For example, the number of bankruptcy filings in 2003 was 420% of what they were is 1985. During this same period of time, the population change in t he United States was less than 0.05%. There have been temporary drops in the number of annual filings as there certainly will be for the 12 month period following October 17, 2005. However, the fact of the matter is that the long term trend is definitely upward and there is absolutely no objective or empirical evidence that this trend will change. The fact of the matter is that the total number of personal bankruptcy filings during the past 15 years has increased by an average growth rate of 10% per year. And, the annual percentage of new filing is likely to jump dramatically as the average debt approaches the level at which bankruptcy is declared.

While the Bankruptcy Reform Act of 2005 has made it more difficult to file for bankruptcy, it has done nothing to help the economy or to change any of these hard-core statistics. And, by in fact reducing the accountability of the credit card companies for their cavalier attitude in mailing out millions of credit cards, the credit card companies have just been encouraged to continue their practices of extending credit to everyone. These practices do nothing more than exacerbate the dire financial straits we find ourselves in today. And, therefore, the number of new bankruptcy cases will continue to rise.

Of equal concern is the number of ARMS, or Adjustable Rate Mortgage loans. In 2003, 28% of the consumers who originated a mortgage or refinanced an existing mortgage opted for ARMS. The percentage jumped to more than 50% by the middle of 2005. The interest rates on about half of these mortgages were tied to the 1-year Constant Maturity Treasure Index, or CMT. The remainder of the ARMS was tied to the 3-year or the 5-year CMT indexes.

The CMT is based on the average yield on US Treasury securities, which rises when the Federal Reserve Bank raises the overnight funds rate. This is the rate that that banks must pay for short term loans. The overnight funds rate has been increased 14 times since September 6 of 2003 and is currently close to 5.0%. The interest rate that the prime consumers received in 2003 on their ARM mortgages was approximately 4%. The CMT started increasing on January 14, 2004 and has continued to increase since that time.

How do the increases in the CMT impact the ARM mortgages? Let’s look at a typical couple who have a $150,000.00 ARM and an after tax income of $50,000.00 per year. The current interest rate on their mortgage is $6,000.00 per year. If their mortgage rate is adjusted up by a factor of just 3%, then their interest payments will increase by $4,500.00 per year. Also, if this same couple has $20,000.00 in credit card debt, then with the recent changes in the required minimum payments and the increases in the credit card interest rates, then this same couple will face an additional $700.00 per month in debt payments.

But wait; in addition to these increases in their debt payments, we have to look at the recent increases in energy costs. These costs have risen by approximately 45% in the past 2 years. Direct energy costs include gas for motor vehicles, natural gas for heating and cooking, and electricity. Indirect energy costs result in increase in all consumer products and services. We have already seen the first increases in the inflation rates.

The bottom line is that things just don’t look very good for the future of the average American consumer but certainly look great for those of us involved in consumer bankruptcy work. And, it seems almost inevitable that this “perfect financial storm” will soon trigger a major depression.

It is all pretty scary!