Transition Canada: Economics: The Devil Is In The Details

The current economic picture is extremely complicated and controversial however I am going to try to just report a few basic facts that will give you an idea of the trends and hopefully the future probabilities will be relatively obvious. I will mostly use U.S. figures for an important reason: whatever happens to the U.S. will happen to the world and especially to Canada, its largest trading partner.

Here is the financial picture at the average U.S. household level.Source: U.S. Federal Reserve

Nobody is going to be retiring on that net worth. Also, in terms of the U.S. households and their investments towards their future, keep in mind that in order to get the wealth out of a house or other investment you have to sell it to somebody who can afford it. If you consider demographics and those young folks who can’t seem to get ahead, who exactly do you think that is going to be?

Are we going to be able to save our way out of this?

U.S. household annual saving rate: 4% – see chart below.

Note that the savings rates above are not based on total personal income, but disposable (after tax) income. At the average income from the top chart, the average tax rate will be about 25%. The chart makes the savings rate jump in ’08/’09 look significant however lets do the math: ~50,000 – 25% =  37,500 x 4% = $1,500 per year.  Not too significant. How do you think this compares with the dollar amount of annual interest on that $103,900.00 the average U.S. household owes? The simple analogy is a boat that is taking on water faster than it is being bailed out.

Can they/we depend on pensions then?

Actual amount of money in private pension funds: on average less than 5% of the money contributed. In a manner similar to the way banks manage their money, only a small portion of the contributed money is not loaned out (invested) in some way. Below is a chart that compares the average private pension fund asset allocation for both U.S. (top) and Canadian (bottom) pension funds in 2007 and 2008.

Source: CIBC Mellon

In plain language what the table says is that 95% of private pension money has been invested in stocks, bonds and similar things that are market dependent. Their value will go the way the stock market goes. For the past many decades, when things have consistently gotten better, this was good. What happens though if and when the reverse starts to happen?

Can the government help? For the answer to that, see this post. Hint – the answer is no.

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