Paul Krugman gets a good dig in at the crowd who used to argue that our national savings rate was a quaint anachronism because it didn’t count the soaring values of our houses and stocks. Let us hope that, in the next great asset bubble, which should arrive in 40 years or so, we will at least have learned not to make this mistake again:
By now everyone knows the sad tale of Bernard Madoff’s duped investors. They looked at their statements and thought they were rich. But then, one day, they discovered to their horror that their supposed wealth was a figment of someone else’s imagination.
Unfortunately, that’s a pretty good metaphor for what happened to America as a whole in the first decade of the 21st century.
Krugman cites the latest Fed study of household wealth, which shows that the average American household hasn’t gotten any richer since 2000. Then he explains the illusion:
For most of the last decade America was a nation of borrowers and spenders, not savers. The personal savings rate dropped from 9 per cent in the 1980s to 5 per cent in the 1990s, to just 0.6 per cent from 2005 to 2007, and household debt grew much faster than personal income. Why should we have expected our net worth to go up?
Yet until very recently Americans believed they were getting richer, because they received statements saying that their houses and stock portfolios were appreciating in value faster than their debts were increasing. And if the belief of many Americans that they could count on capital gains forever sounds naïve, it’s worth remembering just how many influential voices — notably in right-leaning publications like The Wall Street Journal, Forbes and National Review — promoted that belief, and ridiculed those who worried about low savings and high levels of debt.
Then reality struck, and it turned out that the worriers had been right all along. The surge in asset values had been an illusion — but the surge in debt had been all too real.
And here’s the scary conclusion–especially scary considering how unbelievably pessimistic most people are these days (except, it seems, for Citi boss Vikram Pandit, Bank of America boss Ken Lewis, and Treasury Secretary Tim Geithner):
So now we’re in trouble — deeper trouble, I think, than most people realise even now. And I’m not just talking about the dwindling band of forecasters who still insist that the economy will snap back any day now.
Read Krugman’s whole column, Decade At Bernie’s >
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