Saturday, February 3, 2007

from the greatest to the dumb and dumber generations

THE GREATEST. A few years ago, my children gave me Tom Brokaw’s best-seller, The Greatest Generation. I wouldn’t say it was a fascinating read but I did enjoy reading it because it brought back a flood of good memories. The people and their recollections were people like my dad and the men of his generation who I remember from my childhood. These were guys who came of age during the Great Depression and WWII, then went on to accomplish great things in the post-war era. There was a certain quality, an attitude, a mindset, that they shared that I never thought of before, let alone appreciated, until I read the book.

They had character.

DUMB. This week came the announcement that savings as a percentage of after-tax income, the U.S. savings rate, is at the lowest level since the depths of the Great Depression. Now savings rates tend to be lower during bad economic times. If so, the current savings rate should be high. The economy is doing quite well, thank you very much. National income is growing strongly and we are at or very near what is considered full-employment. Although not the best indicator of the economy, stock markets are strong as well. The Dow Jones Industrial Average is hitting record levels and the other stock market indicators are very high.

Now there are technical reasons why we must be careful in comparing savings rates between different time periods, but I will spare you the details. However, the difference in rates is so great that there no need to quibble over the fact that the U.S. savings rate is at a very low level.

The following graph shows the US savings rate over the past forty years. Notice that it has been trending downward (i.e., dropping like a rock) over the past twenty years. What happened?

The demographic bulge known as the baby boomers were in their thirties back in the mid-1980's. The oldest ones were starting to hit forty. This is a period in the life cycle when households start saving more, not less. As the bulk of the baby boomers aged even more and entered their forties, the savings rate should have gone even higher, and then even higher during their fifties. My generation, especially since there are so many of us, should be drawing the average savings rate up, not down.

What happened is the pathetic behavior of my undisciplined generation (including me). Never had a generation been so rich. Never had a generation in this stage of their life cycle acted so immaturely, not saving for the future and not delaying gratification like they were teenagers rather than adults.

This is not a proud moment.

DUMBER. I’ll save that for my next post.

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