America's imaginary net worth

When Americans stopped saving money, we were told not to worry, because, really, we were all rich. We were misinformed.

Published March 12, 2009 5:56PM (EDT)

Do you remember, back in early 2006, when we learned that the personal savings rate for Americans had turned negative in 2005, for the first time since the Great Depression, how the news was dismissed by some optimists as misleading, because the net worth of Americans -- as represented by their homes and stock portfolios -- was steadily appreciating?

What, you say, your can't recall anything that happened before the onset of the Great Recession? The Bush years are a blur to you now? Well, here are some reminders.

Economist Nariman Behravesh, in the Wall Street Journal:

The alarm about the negative U.S. saving rate has been overdone. First, it is a very narrow measure of household finances. A more complete measure is household net worth, that is, assets minus liabilities. By this measure, U.S. consumers are in great shape.

Investment guru Ken Fisher, in Worth Magazine:

Our official saving rate doesn't reflect reality. See it this way: The rate headed south as Americans shifted savings from the CDs, money markets and bank accounts of past decades into appreciating assets including businesses, stocks, real estate, pensions and more -- growing their net worth. It's not about spending profligately, but about saving in a new and better way and boosting productivity.

Alan Reynolds at Townhall:

I am not opposed to more saving, or to virtue in general. But last year's low personal savings rate was no "crisis." And the sensational analogy with 1933 was sensationally ridiculous.

Reynolds gets a special award for noting, in reference to the worry that net worth locked up in a home might be tough to get at for retirees, that "you don't have to sell your home to spend a fraction of the equity. Just take out a bigger mortgage, a home equity loan or a reverse mortgage."

And just for fun, here's an unbylined comment from MarketMinder:

It's safe to say consumers are in better financial shape than they have ever been. Don't bother with negative savings mumbo jumbo. Toss it in the heap with the other economic statistics to ignore.

Memories, memories. On Thursday, the Federal Reserve reported that "U.S. households suffered a record-large 9 percent drop in wealth" in the fourth quarter of 2008.

Household net worth dropped by $5.1 trillion from the prior quarter to $51.5 trillion. For the full year, net worth dropped by $11.2 trillion, reflecting steep declines in the housing and stock markets.

The 9 percent drop in one quarter was the largest drop since records started being kept. And what did Americans have as a cushion to prepare themselves for this calamitous plunge in the value of their stocks and real estate? Absolutely nothing, because of that negative savings rate that so many analysts told us was not a problem.

As for me, I think the last sentence of my post from Jan. 30, 2006, holds up pretty well.

We aren't saving any money for a rainy day. When the storm does hit, it is going to hurt.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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