If there ever was any doubt that the Wall Street Journal is basically useless for anybody trying to understand the economy, this article should remove it once and for all.

Hard-Hit Families Finally Start Saving, Aggravating Nation's Economic Woes

 

By KELLY EVANS

BOISE, Idaho -- Rick and Noreen Capp recently reduced their credit-card debt, opened a savings account and stopped taking their two children to restaurants. Jessica and Alan Muir have started buying children's clothes at steep markdowns, splitting bulk-food purchases with other families and gathering their firewood instead of buying it for $200 a cord.

As layoffs and store closures grip Boise, these two local families hope their newfound frugality will see them through the economic downturn. But this same thriftiness, embraced by families across the U.S., is also a major reason the downturn may not soon end. Americans, fresh off a decadeslong buying spree, are finally saving more and spending less -- just as the economy needs their dollars the most.

Usually, frugality is good for individuals and for the economy. Savings serve as a reservoir of capital that can be used to finance investment, which helps raise a nation's standard of living. But in a recession, increased saving -- or its flip side, decreased spending -- can exacerbate the economy's woes. It's what economists call the "paradox of thrift."

U.S. household debt, which has been growing steadily since the Federal Reserve began tracking it in 1952, declined for the first time in the third quarter of 2008. In the same quarter, U.S. consumer spending growth declined for the first time in 17 years.

That has resulted in a rise in the personal saving rate, which the government calculates as the difference between earnings and expenditures. In recent years, as Americans spent more than they earned, the personal saving rate dipped below zero. Economists now expect the rate to rebound to 3% to 5%, or even higher, in 2009, among the sharpest reversals since World War II. Goldman Sachs last week predicted the 2009 saving rate could be as high as 6% to 10%.

As savings increase, economists say, spending is likely to contract further. They expect gross domestic product to decline at an annualized rate of at least 5% in the fourth quarter, the biggest drop in a quarter-century.

"The idea that the American family will quickly spend us out of this recession is a fantasy. It won't happen," said Elizabeth Warren, a professor of law at Harvard University who last month was named chair of the Congressional oversight panel tasked with overseeing the distribution of the government's Troubled Asset Relief Program funds.

In Boise, families like the Capps and Muirs illustrate the paradox. This metropolitan area at the foot of the Rocky Mountains is home to a half-million people and is a base for electronics manufacturers such as computer-chip maker Micron Technology Inc. The area weathered downturns in the early 1990s and 2001, with unemployment rates remaining well below the national average. But now people here are socking away money they once would have spent, contributing in part to failing stores, shuttered restaurants and rising unemployment.

In 2003, the Capps moved to Boise from Swisswater, Pa., after Mr. Capp received an offer to work for Electroglas Inc., a company that makes equipment used in producing semiconductors. Pay for his field-service engineer job started at $65,000, and Boise's cost of living was lower than Pennsylvania's. Rick and Noreen and their two children -- Noah, now 13 years old, and Ellen, now 16 -- were excited to ski in the Rockies instead of the Poconos.

Move to Boise

The Capps sold their Pennsylvania home for $164,000 and bought a slightly larger, 2,200-square-foot home on a cul-de-sac in the Boise suburb of Meridian. They financed the $175,000 home with a 30-year mortgage, at a fixed rate of 5.8%.

Their children settled in well: Ellen sings in the school choir at Meridian High School, while Noah went to a local charter school and signed up for the chess club. In 2006, Mrs. Capp, now 45, finished her bachelor's degree in psychology from Boise State University, and began working part-time for a mental-health clinic, earning about $10,000 a year. Mr. Capp, 44, also took classes at BSU.

Four years ago, the Capps took out a $25,000 line of credit on their home and used it to buy a large sectional couch for their family room and a used Toyota 4Runner, to go along with the family's 1995 Toyota Corolla. Over the years, they also built up about $11,000 in credit-card debt and $40,000 in student loans.

But given the rising value of their home and of Mr. Capp's stock options, their debt didn't seem alarmingly high, they said. As the resale value of their home reached nearly $300,000 in 2006, the family took trips to Disneyland, paid $900 for ski passes and signed Ellen up for fiddle lessons.

That all changed quickly. The housing market in Boise started to turn downward at the end of 2006, followed by the stock market and the economy. Around the end of 2007, Mr. Capp's employer began laying off some of its field technicians as customers put off servicing their equipment. "It's just been one thing after another," says Mrs. Capp.

The Capps started cutting back. In late spring, they began to trim their spending and paid down about half of their $11,000 credit-card debt. This summer, they used more than half of their government stimulus check, about $1,000, to open a savings account with an attractive interest rate of 5%.

"We never go downtown anymore," says Mrs. Capp. "We're trying to consume less gas, less electricity, less food. It's across the board."

Even the family's cable-TV subscription didn't escape the scalpel. "It's been killing me because I don't get the Cartoon Network anymore," says Noah, a shaggy-haired teen. "I'm missing so many new shows."

Community Impact

The impact of such decisions is visible around Boise. At Home Federal Bancorp, a $725 million bank with 15 area branches, the number of new savings accounts was up by 26% in December from the previous year, said Steve Eyre, the bank's head of consumer banking. He said the bank is also seeing people save in their checking or money-market accounts. "It's pretty interesting to see those balances actually increase at a time when there's higher unemployment," he said.

Meanwhile, many downtown restaurants have closed this year, including a number of locally owned eateries. Satchell's -- a family restaurant that was the Capps' favorite -- is gone, as are Zutto Japanese Restaurant, the 8th Street Wine Company, Mortimer's Idaho Cuisine, Gino's Grill, the MilkyWay and a French place called Andrae's. Retail store closings have become so pervasive that the sign outside one surviving store, Dick's Stereo, now proclaims "WE ARE STILL HERE."

National retailers are pulling out as well. The Boise Towne Square, the region's primary shopping mall, is losing one of its anchor tenants, a Mervyn's department store. A furniture store across the street has also gone out of business. A nearby plaza has lost its two main tenants -- Linens 'n' Things and Circuit City -- as both liquidate nationwide.

Unemployment in the Boise area is still below the national average of 6.7%. But the rate has risen swiftly, to 6% in November 2008 from just 2.7% a year earlier. Unemployment is expected to climb to at least 8% by 2010, according to Moody's Economy.com, about the same rate forecast for the nation as a whole.

By October, Mr. Capp, too, was out of work. His employer, Electroglas, trimmed its North American work force of field technicians from more than a dozen when Mr. Capp started to just four after he and several colleagues lost their positions, he said. Electroglas, based in San Jose, Calif., declined to comment.

With a severance package of about $10,000, the Capps say they paid off their remaining $6,000 in credit-card debt and have been living off the dwindling remainder.

Keeping the Old Car

Frugality has become a family responsibility. Mrs. Capp, a friendly and effervescent woman, nixed replacing her Toyota Corolla, even though it has 253,000 miles on it, a cracked windshield and Hawaiian-print covers over its splitting seats. The Capps have given up on skiing this year. Disposable paper towels have been replaced by washable rags.

Ellen's college options are also limited. The family hadn't started saving for college before the downturn and can't put away enough money now. "We're really pushing her toward scholarships or anything that can help pay for it," says Mrs. Capp. They've considered having their tall, lanky daughter try modeling, but portfolio shots cost a couple hundred dollars.

Jessica Muir, too, would like to be socking money away for her children's college educations. But the 31-year-old mother of three says she also can't afford it now.

Jessica and Alan were high-school sweethearts in Caldwell, a small community near Boise. They married young. Mrs. Muir worked as a dental assistant before the couple's first child, Gavin, was born five years ago. In 2006, Mrs. Muir gave birth to twins.

The same year, they bought a modest two-story home in Nampa, part of the Boise metropolitan area, with enough room in back for a vegetable garden. Unable to afford a 20% down payment, they took out two mortgages to buy the $144,000 home. Mrs. Muir cashed in her 401(k), using the roughly $3,000 to pay for insulation and a fence. The Muirs figured they'd get their money back when they sold the house for a higher price a few years later.

IRA Hit Hard

It hasn't worked out that way, with real-estate prices falling along with the rest of their investments. Alan Muir's government job as an Agriculture Department grape researcher is more secure than most, but his combined 401(k) and individual retirement account is down by about half, to $13,000.

To pare back, Mrs. Muir started "the Moneysavers Club," an email group of about 30 people. The members alert each other about deals such as $8 winter coats at Old Navy, and they split bulk purchases of sugar and other staples. Mrs. Muir stores food in her garage, including vegetables she's grown and canned herself. When she saw a great deal on eggs recently she bought 10 dozen, which she cracked into ice-cube trays, froze and transferred to bags for cold storage. "Not many people know eggs freeze," she said.

She also sells hand-crocheted hats and scarves on Craigslist and at local bazaars, bringing in $85 on a recent weekend. Her husband, meanwhile, charges $20 an hour for guitar lessons on Wednesday nights, and takes trips into the Rockies with friends to cut firewood for the family's wood-burning stove. The couple also recently split the $600 cost of a yearling calf with Mrs. Muir's parents, who are raising it on their land in Caldwell. They plan to butcher it and eat the meat.

The cutbacks by the Muirs and others their age mark a particularly profound shift. In the American buying spree of recent years, the most profligate spenders were those under 35. As recently as 2006, for every $100 these Americans earned, they spent about $117. Those aged 35 to 55 had negative saving rates nearly as large. Only the large number of Americans 55 and older, who have always had high double-digit saving rates, kept the overall saving rate above zero, according to data from Moody's Economy.com and the Federal Reserve.

Several factors are now pushing saving rates upward, including tighter restrictions on credit and home borrowing. Growth in consumer credit slowed to 1.2% at an annual rate in the third quarter, the Fed said, far lower than the 3.9% pace in the prior quarter.

The Muirs and Capps, like many Americans, also reined in holiday spending this year. Mrs. Muir started her shopping in July to snatch up bargains.

Mr. Capp didn't want to spend any money at all on family gifts this year. His wife persuaded him that they could spare a few hundred dollars.

The Capps ended up spending about $370 in all, down from about $350 a person in previous years. Rather than spending Christmas day opening one gift an hour -- a Capp tradition -- they invited neighbors over to play the Nintendo Wii video game that was a Christmas gift for the whole family.

This year, Mrs. Capp and her husband are resolved not to touch the $2,600 they have in savings, and to augment as soon as possible. "You look around, you see the closing stores, and you know someone needs to spend," Mr. Capp said. "Just not us."

 

Evolution Denier Ben Stein is of the same demented opinion. 

 

 

Birds of feather, or what?

 

Introducing the Petro

There are (unconscious?) Hayekians everywhere....

Gulf takes wrong currency path
By Chris Cook 

The end-of-year meeting of the Gulf Cooperation Council (GCC) in Muscat apparently saw another step along the road to the creation of a GCC currency designed along the lines of the euro. 

It is surprising, to say the least, that the GCC is not taking a cool step back and reviewing the project from first principles in the light of the continuing global credit crash, which is about to enter its next phase of a wave of defaults in the world of commercial property and private equity. 

The answer can only be that the GCC - composed of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates - perceives that there is no alternative. 

A lucky reader of the Financial Times recently won 10,000 pounds (US$14,500) for identifying what a panel of judges agreed would be the "Next Big Thing" in financial products. This, the judges realized perhaps five years after the IT world recognized the model, is "peer-to-peer" financing - such as www.zopa.com - which directly connects borrowers with lenders, and investors with investments. 

In this model, the financial service provider ceases to be a middleman, or credit intermediary, and becomes a pure service provider. The fact is that in the Internet age there is no need for credit intermediaries, whether private banks or central banks. 

Indeed, Hong Kong managed quite well without a central bank (or lender of last resort) at all, with bank credit creation under the stern control of a monetary authority. 

The 21st century alternative to the central banking model first implemented by John Law in France in 1719 will be a peer-to-peer "Gulf Clearing Union". 

To reach this destination, we must take a swift detour via Switzerland. 

Swiss efficiency
Few have ever heard of it, but most Swiss businesses are members of the Wirtschaftsring-Genossenschaft or WIR. Since 1934, small and medium-sized businesses in Switzerland have routinely extended each other credit - for many years interest-free - and settled this credit in goods and services, rather than in Swiss francs. So transactions are not settled conventionally in Swiss francs created as interest-bearing credit by Swiss banks, or as non interest-bearing Swiss francs minted by the Swiss central bank. In fact, no Swiss francs change hands at all: transactions take place by reference to the Swiss franc as a value unit. 

The pragmatic Swiss are not prepared to rely purely on trust in the ability or willingness of their members to settle debit balances. WIR members are obliged to give security over their property by way of collateral. In other words, the WIR is a monetary system that is "property-backed". It is but a short step from the WIR to a Gulf Clearing Union. 

The GCC members produce between them some 16 million barrels of crude oil per day, and possess some 45% of known oil reserves. In addition, members, particularly Qatar, also have immense reserves of natural gas. 

The key innovation that will enable a Gulf Clearing Union is the simple expedient of creating - within a suitable legal framework - a "petro" unit redeemable in a constant amount of energy value, let's say the energy released by burning 100ml (measured at 20 Centigrade) of n-octane. 

Such a definition of an energy value unit provides a straightforward benchmark for both domestic and international buyers of oil, gas, petroleum products, and even electricity, to use petros - as well as, or instead of, US dollars - in settlement for purchases of GCC production. 

Gulf business-to-business transactions would take place on credit terms within a GCC state-sponsored mutual guarantee framework. No interest as such would be paid, but a provision would be made by both sellers and buyers into a "pool". Service providers formerly known as banks would no longer put capital at risk by creating credit based on it, but would act as service providers in return for a fee, managing the system, setting guarantee limits, and handling defaults. 

Settlement of credit would take place in petros, in goods or services by reference to the petro, or in dollars or other currency acceptable to the seller. 

Domestic benefits
GCC use of carbon-based energy is staggeringly profligate and increasing rapidly. Introduction of the petro offers a way in which energy prices may be raised to global levels, and suitable distributions made in the form of a "petro dividend" to consumers and businesses, who would then be incentivized to cut back on carbon-based energy use since this would literally save them money. 

Moreover, part of the energy pool could be invested in renewable energy and energy-saving technology: thereby monetizing value which will cost nothing to redeem in the future. 

In this way, a new economic route for GCC countries to transition to a post-carbon economy becomes possible. 

The GCC members are essentially able to make the rest of the world an offer it cannot refuse and can lead the way to a new global settlement, by a transition to an international clearing union configured around the petro as a global reserve currency and value unit. 

The US could then be invited to repay its energy debt to the rest of the world and to do so by turning swords to ploughshares. That is to say, the huge US capacity in human and other resources currently wasted in staggeringly profligate military expenditure could be turned to the peaceful, but profitable, purpose of creating new generations of energy-saving technology and renewable energy production. 

The GCC members should remember what they have either forgotten or never understood: that oil is not priced in dollars; dollars are priced in oil. And they should act accordingly to create a Gulf clearing union. 

Chris Cook is a former director of the International Petroleum Exhange and is now a strategic market consultant, entrepreneur and commentator. 

(Copyright 2009 Chris Cook.) 

What’s wrong with the transit union?

I couldn't have put it better. Mr. McGruer will probably face the usual hogwash about 'natural monopoly' and that kind of thing, but if there ever was a clear case of a 'social good' that is NOT a 'natural monopoly', mass transit is it.

by David McGruer

Hostage - noun, 1 a: a person held by one party in a conflict as a pledge pending the fulfillment of an agreement b: a person taken by force to secure the taker’s demands 2: one that is involuntarily controlled by an outside influence. (Merriam-Webster online dictionary)

Whereas many people see the problems of the transit union as solvable provided there is enough money and will to do so, I see permanent problems as an inherent part of the very nature of the union and so not solvable in the real world.

OC Transpo head Alain Mercier says the transit union is holding the city hostage. Looking at the second part of the dictionary definition shown above, I must agree that the people of Ottawa are being partly controlled by an outside force against their will. But what exactly is the source of this force and what allows it to continue? Union power comes from rules established by the use of government force against the rest of the population.

First is the establishment of a monopoly. The transit company and the union have an absolute monopoly on the transit system. No competitors are permitted. In businesses not propped up by government, socialists decry what they call monopolies (in fact only temporarily the top competitors and we even have laws to prevent these) but when it comes to the business of labour unions they insist on monopoly power. A monopoly prevents competition and much innovation, keeping prices higher and ensuring permanent inefficiencies. Observe that the transit union leader proudly admits that the current strike was started at a time when it could inflict maximum harm to the most people – in winter storm season, just before Christmas in the midst of a severe economic slowdown.

Unions try to improve their lot by excluding other workers from job opportunities. In a free market the use of such force is against the law but with government assistance unions effectively prevent others from competing for their jobs. This keeps people who are willing and able to work unemployed. Because they require victims, if everyone was equally unionized then unions wouldn’t work.

Unions, especially in monopolies, attempt to operate outside real-world economics by taking the determination of wages out of the market. A regular wage is a result of competition among employers for workers and among workers for jobs. The transit union wage has little to do with supply and demand by consumers and is mostly a function of holding the consumer hostage until they pressure government to “do something.” This usually means throwing money at the problem until it goes away, leaving the roots of it to be faced again another day.

Unions can even use force against their members. In the present strike we clearly see union leaders preventing their members from even voting on an offer they might well accept. Who denies union employees the right to speak on the subject of their own contracts? Yet union control is so powerful even this can be prevented, while the law stands by rendered helpless.

Unions are also heavily dependent on government inflation policy. It is the normal path of progress to increase efficiency and lower the prices of goods. Employees increase their purchasing power (lower prices) through the means of and to the degree of their increase in productivity. In order for union leaders to be seen to be accomplishing something, union wages must rise in nominal dollars. In a free market, dollar wages need not rise and thus the union leaders would be revealed as a sham. They depend on inflation to be able to point to dollar wage gains. Inflation erodes the value of dollars over time and hurts most the weakest in society – those living on a fixed income and those without union force to push up their wages at the expense of others.

The problems of transit in Ottawa will not have a permanent solution until a free market is restored: competition for the consumer dollar is allowed, taxpayer subsidies are ended and employers and individual employees are freed to negotiate contracts void of coercion. It is a huge task to undo the damage of decades and we appear short of leaders willing to even publicly identify the problem, much less face it. Meanwhile, we must not give in to the current strike against the citizens of Ottawa.

David is a long time east end resident and amateur philosopher. Comments to the editor are most welcome.
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