Will the Savings Crisis Lead to Stagnation?

Economics on Trial
IDEAS ON LIBERTY
March 2000

by Mark Skousen

“There is a virtuous cycle in which high growth promotes high saving, and high saving in turn promotes high growth.” — Joseph Stiglitz, Chief Economist, The World Bank

“America’s Expansion Cannot Be Sustained.”The Economist, November 6, 1999

In a return to the principles of classical economics, more and more economists agree that thrift is a virtue and should be encouraged. In the textbooks, Harvard’s Greg Mankiw promotes the new view toward saving: “Higher saving leads to faster growth.”(1) Contrast Mankiw with the anti-saving mentality held by Paul Samuelson and other old Keynesians, who argued that higher saving may result in a recession or worse (“the paradox of thrift”).

A newly released study by the World Bank reinforces this new positive outlook for saving? Under the guidance of chief economist Joseph Stiglitz, the bank came to the following startling conclusions regarding world saving:

Saving and interest rates: “The world saving rate has been declining and the world real interest rate has been increasing since the 1970s” (p. 7). Of course, saving rates vary dramatically among countries. For example, they have doubled in East Asia, stagnated in Latin America, and collapsed in sub-Saharan Africa.

Saving and income: “Long-term saving rates and income levels are positively correlated across countries” (p. 12). In other words, saving rates tend to rise with per-capita income. As people become wealthier they tend to save more. But only up to a point. The World Bank notes that saving ratios appear to level off at high levels of income.

Saving and economic growth: “Higher-saving regions have also enjoyed faster income growth.” Countries that save more also grow more, although the evidence is not clear which comes first, faster growth or higher saving. In any case, they go hand in hand. Stiglitz concludes, “high saving is associated with good macroeconomic performance and sustainable access to foreign lending” (p. ix).

Saving and foreign aid: “Most [economists] conclude that aid crowds out national saving” (pp. 17-18). Given that the World Bank’s purpose is to dole out foreign aid, this frank admission is amazing.

U.S. Living on Borrowed Time

Given this positive relationship between saving and economic performance, what are we to make of the sharp decline in private net saving in the United States? The latest data indicates that private net saving-the gap between disposable income and spending-has fallen to a record low of negative 5.5 percent of GDP in 1999. (See the graph below.)

Of course, millions of Americans continue to save for retirement, investment, and other reasons, but lately the debtors have outnumbered the savers. The tenuous government surplus has only partly offset the private-sector dissaving. Who makes up for the imbalance? Foreign investors (as reflected in the growing current-account deficit) are pouring billions into U. S. debt and equity securities, bank accounts, and real estate.

A recent study by two British economists, Wynne Godley and Bill Martin, warns that the United States is headed for serious trouble. They point to three unsustainable imbalances: an overvalued stock market, the collapse in private saving, and an alarming increase in debt.(3)

Other countries facing these imbalances — Japan, Britain, and Sweden in the late 1980s — experienced sharp slumps after asset-price bubbles burst.

What has caused the sharp drop in U.S. private net saving? Many economists blame the booming stock market, encouraging households to spend more and firms to invest more. I would add two other factors: the Bush-Clinton increases in the marginal tax rate (higher tax rates reduced disposable income, forcing households to save less) and the Federal Reserve’s liberal monetary policy since the 1997 Asian financial crisis (monetary inflation has fueled the bull market on Wall Street).

Throughout the 1980s and 1990s I was bullish on the U.S. stock market. Supply-side economics and globalization kept inflation under control and the economy out of recession. Now, as we enter a new century, most trends are still positive, but we must not ignore the signs of inflation. If Ludwig von Mises and F. A. Hayek taught us anything, it is that artificial prosperity fueled by debt and monetary inflation cannot last forever. The bust is inevitable, although its severity can be offset by tax cuts, privatization of Social Security and Medicare, and expanded savings.

1. N. Greg Mankiw, Macroeconomics, 2nd ed. (New York: Worth Publishers, 1994), p. 86.
2. All citations are taken from Klaus Schmidt-Hebbel and Luis Serven, eds., The Economics of Saving and Growth (New York: Cambridge University Press, 1999).
3. “Living on Borrowed Time,” The Economist, November 6, 1999.

The Exuberant Wade Cook

Ideas Matter
FORBES

By Mark Skousen

The first time I met Wade B. Cook was at a seminar for small investors in the early 1980s, when real estate and other inflation hedges were the rage. Cook gave a workshop on how to buy and sell mortgages–“discounted paper”–for quick profits, which he called the Real Estate Money Machine, which became a best-selling book of the same name. Forget buy-and-hold, he urged. Speculate. Trade mortgages: “Roll them.” Churning mortgages to create a “money machine.”

For a while Cook sold lots of books and tapes and had lots of fans, but apparently his money machine stopped working, and in 1984 he filed for bankruptcy well ahead of the real estate crash that took place later in the decade.

I thought Wade Cook would disappear like the rest of the get rich-off-real-estate gang, but I was wrong. He’s back, reincarnated as a stock market expert. Three of his books are on the Business Week bestseller list: Wall Street Money Machine, Wall Street Miracles and Bear Market Baloney. His book Real Estate Money Machine is back in print. His company is on the radio, promoting his one-day seminars, his books, videos and his three-day, $4,700 Wade Cook Workshops. Apparently the fish are biting.

Never one to overlook an opportunity, Cook has taken his company public (Nasdaq: WADE), and it has risen 500% in the past year. Recent market cap: $210 million. Cook owns 62% of the stock.

Cook’s enticements would catch the eye of any red-blooded investor: Get 14% to 34% monthly returns-consistently! Double your money every 2 1/2 to 4 1/2 months! The evangelist is not timid: “I’m into formulas which produce safe, sane 20%-plus monthly returns,” he says.

You don’t even need patience for the Cook approach: He promises fast results. In his books he annualizes his weekly, daily and even hourly returns. You’d think people would know better, but apparently they don’t.

How does Cook suggest going about investing? Forget buy-and-hold, he urges once again. Trade options. Make full use of margin. Turn your stocks over constantly. “Roll them” like a money machine. He urges buying stock right before the ex-dividend date, capturing the dividend and then selling. But doesn’t the stock price drop by the amount of the dividend “This is not always the case,” Cook claims.

For quicker profits, Cook goads his followers to load up on companies announcing stock splits. He pleads, “Show me a company that has done a stock split, which one year later (or two) is trading down.” Want faster profits? Buy options and buy on margin.

Can’t you get into trouble with a margin account? “Absolutely not.” It’s not surprising that with claims like these Cook’s company has been the subject of a fraud investigation by the SEC since March 1996. He denies any wrongdoing. And goes right on leading naive investors to potential doom.

Perhaps Alan Greenspan had Wade Cook in mind when he referred to “irrational exuberance” on Wall Street. It’s certainly irrational. This is the same nonsense Cook was peddling nearly 20 years ago, but this time it’s stocks, not real estate. The advice is just as dangerous and the people buying it are just as uninformed.

What I find scary is that there is a market for this stuff. The last time Cook prospered was when real estate became overheated and later crashed. Is his resurgence a harbinger of doom. Is the popularity of his stock market stuff telling us something? I hope not.

If it’s good stock market advice you want, read J. Paul Getty’s 12-page chapter on “The Wall Street Investor” in his classic work How to Be Rich. Sample: “The seasoned investor buys his stocks when they are priced low, holds them for the long-pull rise and takes in-between dips and slumps in his stride.” There’s more wisdom in those 26 simple words than in all the get-rich books ever written.

Forbes, December 1, 1997

How to Keep off The Forbes Four Hundred

Ideas Matter
FORBES

How to Keep off The Forbes Four Hundred
By Mark Skousen


“You see that man over there driving that tractor,” my father asked me as we drove by a farm. “He’s a millionaire.” This was in the 1950s. There weren’t a lot of millionaires around in the 1950s. Only my father, who was his attorney, knew that his net worth placed him among the highest 1% of the state’s citizens.

Dad’s client was no miser. He just didn’t believe in flaunting it. Maintaining a low profile is an established American tradition. You don’t have to be a drug dealer to prefer secrecy, anonymity, unlisted telephone numbers. It saves you a lot of bother and unwanted attention. Justice Louis Brandeis once said: “The right most prized by civilized man is the right to be left alone.”

A Warren Buffett cannot preserve his privacy, no matter how hard he tries. He runs a publicly traded company that controls many household names. The same with Bill Gates and with almost anyone who heads a big public company. Donald Trump does not, of course, even want to be anonymous.

But if the stock market or the business world has been good to you and you would just as soon not attract a lot of attention, here are some suggestions.

A prominent international tax attorney (who wishes to remain anonymous, of course) told me, “I know two dozen people who have avoided The Forbes Four Hundred list by going offshore.” He’s not talking about doing it to cheat Uncle Sam–though many people try that. There are legitimate motives: becoming judgment-proof, divorce-proof, or maybe even Forbes-proof.
Here are some ways to avoid tenacious Forbes researchers, litigious relatives and greedy ex-spouses:

1. Own real estate and other assets through non-identifiable trusts or corporations. Trusts may include a revocable living trust, land trust or charitable remainder trust. Such trusts not only avoid probate, but also can hide the identity of property owners. An irrevocable trust can convey ownership of real estate to others. In addition, the corporate veil can hide ownership; Nevada bearer corporations and Delaware corporations are especially popular for this purpose. Real estate expert John Schaub of Sarasota, Fla. has written a report on the subject, “Financial Privacy and Asset Protection for Real Estate Investors” (800-237-9222, $19). In addition to owning property in the name of a trust or corporation, Schaub recommends renting with an option to buy as a way to profit from appreciating real estate without getting noticed. The main drawback with this approach is that you don’t have the same protection against competing claims to the property that you do with a recorded deed.

2. Buy coins, art and collectibles through a reputable dealer or bid at auctions–both anonymously. The right collectibles are portable, recognizable and easily transferable: gold bullion, rare coins, diamonds and other gems.

3. Use trusts and international business corporations (IBCs). This is the ultimate privacy vehicle for wealthy Americans. In addition to foreign bank accounts and real estate, foreign trusts and corporations give additional protection through the use of nominee directors and shareholders. Note: Offshore accounts must be disclosed on Schedule B of your 1040 tax return.
An excellent source for these techniques is Financial Privacy Report, a newsletter edited by Michael Ketcher (612-895-8757, $99, annually).
I recently read in The Wealthy 100 that Ben Franklin was, after taking inflation and relative values into account, among the 100 wealthiest Americans ever. Old Ben had a saying that still resonates with many Americans: “Let every man know thee, but let no man know thee thoroughly.” Though he was a patriotic American, if Ben were around today, I suspect he would keep his affairs private by going offshore–probably to Paris.

Forbes · October 20, 1997