Agora editors' email thread: Cash crunched

Here's another storm cloud looming on the economic horizon: At the moment, U.S. banks and thrifts are running thin on deposits.  Justice Litle of Outstanding Investments directs our attention to a piece in today's Wall Street Journal:

Total deposits as a percentage of assets on hand at the end of September at the country's more than 8,700 insured banks and thrifts reached the lowest level since the Federal Deposit Insurance Corp. was established in 1933. At the same time, the banking industry's net interest margin — the difference between the average rate banks earned on their interest-bearing investments and the rate they paid to fund those investments — dropped to a 17-year low in the third quarter of 2006…

One reason: Individuals and businesses are continuing to shift a larger share of their cash into higher-yielding securities and other investments and away from partly insured but lower-yielding bank accounts. 

Not so fast, says Whiskey & Gunpowder's Byron King :

Yes, maybe.  But this is only one reason.

Perhaps I have spent too much time with my nose in the bankruptcy statutes and case law lately, or breaking bread with the U.S.Bankruptcy  Trustee crowd.  Allow me to offer some more thoughts and reasons for the situation……

Household savings are a variety of endangered species, certainly for most working-class Americans.  But not to offend the working class, the middle & upper-middle classes are falling into the same category as non-savers.  Most US households have no current savings plan.  None. Zip. Nada.  Most households live paycheck to paycheck, and most households are constantly on the edge of technical insolvency.  Lost job, illness, divorce, sudden financial hit….  most households will be pushed over the edge.  This is as true in the leafy, McMansions of the McSuburbs and ex-urbs, with their well-coifed soccer moms and well-shod hockey-dads, as it is true in the rows of urban and near-suburban tract houses in which dwell the blue-collar workforce of the nation (or what is left of it).

And of those US households that do "save money," the vast majority have only nominal savings.  Many people who try to save really don't know what they are doing.  They will put $100 in a passbook savings account at 2.2%, but still carry credit card debt at 24%.  Nobody has ever explained to them the difference, or advised them how to do it better.  Best figures are that close to 50% of US households have negative net-savings (even excluding mortgage debt).  With mortgage debt included, something like 70% of US households (homeowners and renters in total) have a negative balance sheet.  (OK, so they "own" a house with some equity and a mortgage.  If housing prices decline 20%, then they are in negative territory.)  One US bankruptcy trustee put it to me this way….  "More US citizens are net in-debt, than voted in the last presidential election."  Doesn't say much for either US financial habits, or political trends.   

Most households are busy paying daily bills, and past debt.  This uses up essentially all income.  It is a situation of, as the saying goes, "too much month left at the end of the money."  So it is no wonder that there is so little (or nothing) left over to save. 

Was it Warren Buffett who coined the phrase "sharecropper society?"

We are there.

Justice's reply:

Indeed… one could argue that, by way of stealth inflation, Rush Limbaugh's swiftian proposal for taxing the poor has come true.

The paper asset largesse bestowed by present day monetary policy amounts to the largest wealth transfer in all of human history. 

p.s. Here's a fun thought: perhaps the natural state of things is for the many to be ruled by the few. Could America itself simply be reverting to an ancient mean?  

On the subject of that "paper asset largesse," Justice directs us to another WSJ article from Wednesday highlighting a new McKinsey & Co. study.  The lede: "The world's financial system is overflowing with stocks, bonds and other financial assets — $140 trillion worth, to be precise."

That's three times world economic output.  The story was buried on page C8, natch.  Who says the dot-com bust killed the "New Era" mentality?

The Daily Reckoning