“America’s aversion toward saving”

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I’ve always been an admirer of Morgan Stanley economist Stephen Roach, but over the years his ‘better eat your vegetables’ view of the American economy has seemed a little out of touch. Now the tide is turning, though, and his old warnings ring true. At least to me they do.

His column today is worth reading: ‘America’s aversion toward saving did not appear out of thin air. Waves of asset appreciation - first equities and, more recently, residential property - convinced citizens that a new era was at hand. Reinforced by a monstrous bubble of cheap credit, there was little perceived need to save the old-fashioned way - out of income. Assets became the preferred vehicle of choice.’

Now what? Roach: ‘As home prices move into a protracted period of decline, consumers will finally recognize the perils of bubble-distorted saving strategies. Financially battered households will respond by rebuilding income-based saving balances. That means the consumption share of gross domestic product will fall and the US economy will most likely tumble into recession.’

This is a pretty bearish view and many of you will disagree. Here’s what I find interesting: let’s say Roach is right, and what the American economy needs is a painful period in which consumers rediscover the habit of saving. How will the government react? The government usually reacts to an economic slowdown by trying to prop up consumer spending, not encouraging saving.

So what gives? ‘Eat your vegetables,’ or ‘Let’s all go out for tax-free ice cream?’

I’m interested in your thoughts on that one. Email story tips to peter.viles@latimes.com.
Hat tip: I owe someone a hat tip on this one. It’s coming, when I find your email.