Saving the Savers

Spending by consumers is the holiest of holy grails for the American economy … and of nearly all those who watch it.

This is especially true right now, during the last two weeks of the holiday spending season.

It’s when the bean counters and bigwigs in the retail industry stay glued to their daily consumer spending reports like stock market day traders to their five-minute bar charts.

It’s when the folks at the nation’s giant retail chains — like Wal-Mart, Sears and even twice-bankrupt FAO Schwartz — huddle in their war rooms, watching the spending, dissecting the spending and debating the spending almost by the hour.

This is also when Washington and Wall Street will be waiting and wondering:

How big will the consumer spending splurge be this holiday season?

Which particular hot products will be the run-away super-hits, attracting this year’s great tidal wave of spending madness?

Will consumers spend wildly on deeply discounted items … only to snap shut their pocketbooks as soon as the discounts fade? Or will the big discount sales act as a starter engine to kick off an even bigger spending splurge?

All this, say the pundits, is very critical to the broader questions — whether or not the economic recovery can be sustained … how long the stock market rally can continue … and what will happen to YOUR investments and YOUR job next year.

If only consumer spending can stay strong, they say, the entire economy will be strong. And as long as the economy is strong, they argue, the rising tide will carry nearly everyone and everything to higher ground, including you and your portfolio.

My thoroughly researched, deeply considered response to all this?

Baloney!

CHRONIC CAPITAL SHORTAGES

Ultimately, what drives any economy in the world is CAPITAL. And the only way to build that capital is by SAVING — not spending. The money saved — in banks, in insurance companies, or in money market funds — goes into a national savings pool. That national pool, in turn, is the primary source the capital companies need to grow.

But in recent generations, the habit of saving has simply not been a part of the prevailing American ethic.

Scrooge capitalists are relics of the past. Penny-pinching bureaucrats were gone even earlier. Only lavish spenders are society’s ever-worshiped super-heroes.

All this spending does seem to fuel the economic engine for a while. But consider the true, lasting impact in each major sector of the economy:

CONSUMERS: Millions of average families have no stash of cash. To embark on an average holiday shopping spree, they’ve got to get a fat bonus from work … a big tax refund check from Uncle Sam … or triple-zero financing (zero down, zero interest, zero payments) from Detroit.

As long as the funny money is flowing, fine. Consumer confidence soars, and everyone is happy. But woe on us — and the entire economy — when the funny money dries up! For reasons no one can quite explain, consumer confidence begin to fall again (much as it did last week).

INDUSTRY: The dearth of savings creates a chronic shortage of capital. So when capital rushes into certain sectors, it leaves other sectors with virtually none.

Example: Technology companies in the tech boom of the late 1990s. They suck up capital like a giant twister sucks up cows and pigs … only to dump it all in a heap of bankruptcies and broken portfolios.

Another example: Mortgage companies in the refinancing boom. As long as interest rates continue to fall, trillions in new capital flood into the mortgage market. As soon as interest rates stop falling, the boom ends, with still-untold consequences.

Meanwhile, however, the American steel industry is relegated to the rust pile of history — decaying plants, busted behemoths, even bankrupt employee pension plans. Aluminum, textiles and other core industries suffer a similar fate. Farming, education, even emergency healthcare are neglected.

GOVERNMENT: Capital shortages strike cities and states like a category five hurricane. Even in the wake of 9/11, budgets are cut for law enforcement, security and 911 emergency staff. Even after dire warnings of massive California fires, new funding dries up for firefighters in virtually every state. Throughout the nation, money for libraries, schools and clinics are slashed.

Then, jumping headlong into this capital-hungry crowd, comes the hungriest of them all: Uncle Sam, sucking up over $800 billion in scarce capital in 2003 … gobbling up over $1 TRILLION in 2004 … and leaving consumers and industry in the gutter, scrambling for the crumbs of capital that remain.

Despite the apparent wealth and prosperity, the fact is our country suffers from a fundamental, long-term, chronic SHORTAGE OF CAPITAL.

Why? Because Washington, Wall Street, and most of America have transformed SPENDING — and the borrowing needed to support it — into our only national religion. Meanwhile, SAVING, the only enduring fountainhead of capital, is frowned upon as an outdated cult.

Spenders are continually lauded by the president, the financial press, and, of course, by the eternal bombardment of the advertising media. Savers, meanwhile, are punished with the lowest interest rates in 45 years.

Indeed, the mass proselytizing of the spending religion is so powerful and so overwhelming, that most people have forgotten that it wasn’t always this way. And at least two generations of Americans never knew to begin with.

THE FAMILY “FORTUNE”

In my father’s time, it was very different.

When he was born in Manhattan, eight years after the turn of the last century, his parents had recently arrived, virtually penniless, from Romania.

His father didn’t earn enough as a tailor to pay rent for an apartment. Nor did his mother as a seamstress. So the opportunity to live rent free as janitors and superintendents in a tenement building in East Harlem was a godsend. So they grabbed it.

Years later, when I was growing up, Dad told me dozens of incredible stories about those days, and I’ll be glad to share some of them with you in the months ahead. He rarely read to me at bedtime. But he sure told me some great tales of the early 1900s in upper Manhattan.

Among them, the one that has always amazed me the most is how he and his many siblings helped build the family “fortune.”

You’re probably thinking I’m going to tell you — again — how Dad borrowed $500 from his mother in 1929, sold short the stock market and transformed it into $100,000.

If so, you’re mistaken. That’s not the fortune I’m talking about now. The fortune I’m referring to this time is the original stash of cash from which the $500 came in the first place.

That was the original family fortune. It didn’t come from an inheritance. And it certainly didn’t come from investments. It was built up exclusively from arduous, relentless, and extremely disciplined SAVING, the sweat and tears of every family member.

Perhaps you’ve had similar experiences in your youth or heard similar stories from your parents. But Dad’s were indeed unique, at least to me.

When Dad was just five, he and his older brother would regularly “invest” in a case of matches, and spend as much as 12 to 14 hours hawking them on the busiest street corner they could find, not returning home until the last match was sold.

Every single dime went back to their mother. Keeping even a penny for themselves was tantamount to thievery.

Once, my father found an injured small bird on the roof of their building and began nursing it back to health. But it happened to be a particularly tough month, with no income and no extra money for meat.

One afternoon, when he came back from school, he learned that the “chicken soup” for dinner was not exactly made from chicken.

He promptly lost his appetite. But he also learned, again, the hard lesson about just how precious the family savings really was.

The candy store across the street was not exactly a candy store, either. The owner, also a not-so-recent immigrant from Eastern Europe, used it as a front for a far more lucrative business — selling a different kind of “candy” to famous boxing champions on the East Side and wealthy addicts on the West Side, occasionally recruiting pre-teens, like my father and uncle, as delivery boys.

The boys never questioned what was in the small, neatly-wrapped bundles. And my grandmother never questioned the source of the few extra dollars that would occasionally come her way. Every single penny — whether from matches or from elsewhere — went into the same family stash.

They had so little. And, yet, strangely, they managed to save so much — many times more, in fact, than the average American family saves today.

KOZUKAI and CHOKIN

This is not an isolated phenomenon. Nor is it just a custom you can attribute to tough times, or to times past. In fact, in most growing, vibrant, and healthy societies — whether modern or traditional — savings is usually the norm, the mainstay of the economy.

In 1980, I worked in a Japanese brokerage firm, and at the end of each month, there were invariably four events — coming together at the same time and place — that always left me spellbound.

First, all monthly salaries — paid to everyone from the floor traders who scalped pennies to the CEO who presided over big underwriting deals — were distributed in CASH. Not checks. Not direct bank transfers. Just cold, hard cash stuffed into four-by-eight-inch, brown money envelopes and handed out on the last business day of every month.

Second, everyone habitually stuffed their thin — or fat — money envelopes into the inside pocket of their suit jacket, and so did I.

Third, nearly all of us went home by subway or national railway, joining the army of millions of other “salarimen,” all returning home that evening, all with their own money envelopes thoughtlessly tucked into their inside jacket pocket. And all this happened monthly with virtually no pickpocket incidents or muggings.

Once I tried to calculate how many billions of yen in cash were flowing through Japan’s public transportation system on payday each month. I started with an estimate for Tokyo and Osaka, the two largest business centers.

But long before I could tally up the equivalent sums at dozens of other large cities across Japan, I gave up; and my mind drifted to the fourth factoid that many Americans might find even harder to understand:

With rare exceptions, the Japanese custom — both then and, to a lesser extent, today as well — is to hand the entire pay envelope over to the woman of the household.

The man is the primary wage-earner in the overwhelming majority of households. But in exchange for his hard labor, he gets nothing but “kozukai” — a small allowance of spending money. All the rest goes to cover basic living expenses plus one final destination — “chokin” (SAVINGS)!

The Japanese aren’t the only ones. Savings are revered in China, India and much of the Middle East. In inflation-ridden countries, the savings goes into silver, gold and jewels. In some of the poorest countries, it goes into stashes of grain and other non-perishable foods.

No, the United States is not necessarily unique in its spending ways. There ARE other countries that have mimicked our spending ways.

But the way we borrow and spend in the United States today is certainly NOT the norm — either historically or culturally.

DIRE CONSEQUENCES

When the nation’s large pool of savings has shrunk to a small puddle, when capital is in such chronic short supply, that we must beg abroad for foreign capital, or borrow from future generations to fill widening gaps, trouble is surely at hand.

But sooner or later, one simple fact of life inevitably comes back to haunt all those who renounce saving for the sake of spending: THE MONEY RUNS OUT.

When that happens, the consequences are dire indeed. No magic solution or event can turn it around — no presidential decree, no act of Congress, not a great victory over Saddam, not even Dow 10,000, as Wall Street celebrates his capture.

The money is running out, and this holiday spending season, despite the HUGE economic stimulus of recent months, is shaping up to be one of the first victims.

This is fundamental. When the money runs out, there is only one way to bring about a true economic recovery: SAVING.

And, alas, there’s only one way to save: Working more and spending less.

I’m optimistic that’s what’s going to happen here in America. But it won’t happen overnight. And it won’t be pretty.

Brace yourself. Because when consumer spending falls, so will the entire economy. On this last point, the pundits ARE right.

Good luck and God bless!

Martin

Martin D. Weiss, Ph.D.
Editor, Safe Money Report
Chairman, Weiss Ratings, Inc.