Saving Grace

One of the ways to detect or measure a market bubble is to study flows of investment funds. A careful look at these flows in the last few years reveals a couple of surprises: one about the stock market, the other about the allegedly low rate of savings in the US.

Every month, mutual funds report the staggering sum of new cash pouring into the stock market: $20 billion, more often than not. A sidebar to each report notes the relationship between big buying and big increases in the market averages, usually noting "unsustainability."

Every month, but in an unrelated story, the Commerce Department reports on personal income, consumer spending, and a newly dismal performance in the rate of national savings.

Something doesn't add up, here. If we don't save any money, where are we getting all the money we're putting in the stock market?

Are we borrowing it? Nope: despite what you read, America's personal and corporate balance sheets are in good order, debt payments as a percent of income right on the long term average, and there is no evidence of unusual stock speculation on margin.

Foreign money? No more than the usual 15% or so.

Well, then we must be liquidating investments somewhere, everywhere, in order to buy more stock. Guess again: bank deposits, CD's and such, are growing slowly as the Boomers refuse to pursue their parents' hyper-conservatism, but there is no liquidation. Ditto money market funds and bonds of all kinds. There is certainly no liquidation in real estate; if anything, more money is being invested in housing than ever.

"Doesn't add up" is a bit of an understatement. The Commerce Department says our national savings are growing at roughly 4% of $7 trillion in national income: about $280 billion a year. Henry Kaufman (you may remember, the "Dr. Doom" of 1980's fame) reports that over the last five years, average annual investments in the financial markets have totaled -- drum roll, please -- one trillion dollars.

Where did the extra, "non-saved" $720 billion come from each year?

The economist at Commerce responsible for national income accounts, Leon Taub, is a patient and thoughtful man. He says that there is no direct accounting of national savings; nobody sits down and adds up all the 401Ks and IRAs and Fidelitys and whatnot. National savings are measured by subtracting personal consumption from after-tax income. That's it: whatever we didn't spend, we must have saved.

However, Mr. Taub volunteers that capital gain income is not included, neither from financial nor real estate investments, on the theory that in such transactions there is always a winner and a loser, and no net gain in savings. Mr. Taub acknowledges some discomfort with the metaphysics of this assumption.

For example, the Dow has risen from 200 to 5600 in 60 years. Is this event simply a wash? Another thought: if someone bought a Martin Acres house for $22,000 in 1973, and sold it for $175,000 this year, has no wealth been created, just a winner and a loser?

There are a lot of people trying to figure out the stock market and the savings rate, and nobody is getting real close. However, there is reasonable evidence for two revisionist notions: there is nothing funny about the money going into the stock market, and the world's most inventive economy has found more ways to create wealth than the mere difference between income and spending.