savings rate

Will Rising Rates Derail the Economy?

© Can Stock Photo / focalpoint

At, we are voracious readers and consumers of information. Nothing happens in a vacuum. We therefore pay attention to the economy, the markets, and our holdings, as well as look for potential opportunities to invest. Recently it was time to sort out what it all might mean.

Rising interest rates, long expected here, have caught our attention. Home mortgage rates are at a seven year high1, and other consumer borrowing rates have increased as well. If we spend more on interest payments, we have less to spend on other goods and services.

We investigated, and learned that total household debt payments actually remain near the lowest point in many decades, although they are rising. But the total debt balances are at record highs, above the level reached before the 2008 credit crisis. What gives?

The answer is in the interest rates. Higher debt levels financed at lower rates have reduced our payments as a percent of income. If loan interest rates continue to rise, however, we will probably see more household income go to payments on debt.

There is another piece of income that doesn’t get spent: our savings rate. When we feel confident about the future and our 401(k)’s and other investments are growing, we tend to save less. When the outlook darkens, we tend to save more.

Our savings rate declined from 6% of disposable income at the end of the last recession to the 3% neighborhood now. Historically, it has been slightly lower at times—but we are probably close to the bottom.

The amount we spend is what is left after debt payments and savings—and one more thing: taxes. Taxes, like the other factors, seem to be at relatively low levels now—not likely to go lower. The 2017 tax reform cut levels sharply.

We believe it is likely that record amounts of debt face rising rates in the years ahead; our savings rate will rise sooner or later; and there is no more room to cut taxes. The net effect of these three things seems likely to eventually reduce consumer spending, which is an important driver of the overall economy.

We do not think we are on the verge of recession. Other indicators point to continued growth. But we are in the middle or later stages of the growth cycle—not the beginning. We are looking at opportunities that fit the times, as always.

Clients, if you would like to discuss this or anything else, please email us or call.

1All data from Federal Reserve Economic Data, Federal Reserve Bank of St. Louis. Accessed May 22nd, 2018

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Screaming Toddlers and the Federal Reserve

© Can Stock Photo Inc. / kondrytskyi

How many times have you read how easy it is to lose weight or build wealth or improve your health simply by developing your capacity for delayed gratification? Relax, we aren’t here to hector you or lecture you. Instead, we would like to explain how and why defective but popular policies are going to cost our future selves.

Resisting the temptation for a smaller but immediate reward in order to gain a larger or more enduring reward later—that is the concept of delayed gratification. The ability to exercise it has been linked to improvements in physical health, mental health, social networks, and wealth. In an economic sense, deferred spending (or saving) is positive because it builds capital that can make us more productive, with potentially higher income and net worth in the future.

Toddlers generally lack a firm concept of “later.” When one decides that a lollipop is needed, talk of waiting until after dinner or tomorrow doesn’t really fly. If you know why they call toddlerhood the “Terrible Twos,” you understand that tantrums work against the idea of delayed gratification.

Our Federal Reserve and other central banks around the world are impatient with the pace of economic growth. One of the supposed “problems” they’ve identified is that we are not spending enough. The savings rate—the part of our incomes that we do not spend—is higher than it has been for quite a while. The Fed knows we could spend more money if we wanted to, but we are stubbornly saving it.

Our economy will be stronger in the future because collectively we are exercising delayed gratification with our money. But the immediate gratification of faster economic growth right now is being sacrificed so that you and I can have stronger balance sheets, less debt, and more money on hand.

You may have noticed that the Zero Interest Rate Policy has drastically reduced the return on savings. And now, in the next step, some central banks are fostering negative interest rates. It is hard to think about, so let’s look at an example. At negative interest rates, you might buy a $10,000 CD and get back only $9,900 at maturity.

Why would the “experts” inflict this upon us? In order to make us spend money instead of saving it. It is like the Zero Interest Rate Policy, only worse. In other words, the central banks are like toddlers who have seen the lollipop and want the lollipop and it better happen NOW!

The Federal Reserve Board has members of varying opinions: some are like toddlers, some behave as adults. Thankfully nobody has begun to institute negative interest rates in the United States.

Our slipping national capacity for delayed gratification is a problem at the leadership level. We want you to know how this might affect you. We are also paying attention and working hard to figure out what we should own, and why, in our investments.

As always, please write or call if you would like to discuss this or other pertinent issues.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.