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Setting her own trend: Savvy young hairstylist is among young people confronting the new economy

Published: Tuesday, Sept. 24 2013 11:45 p.m. MDT

That split between spending and income is possible, Hall said, as long as the increased spending comes from savings or from wealthier people above the median. This is one reason personal savings are critical to long-term growth: someone needs to be able to prime the pump without wealth or debt.

What is lacking in the current recovery, according to Hall, is the surge of hiring that usually accompanies renewed spending, as employers and consumers regain confidence. "We have not seen that recovery growth yet," Hall said.

To get that kind of growth, Hall said, some consumers would need to start buying things they don't really need, but he acknowledged the paradox that long-term growth and stability demands savings, not just current spending.

In any case, Jones is unlikely to contribute much to the short-term spending binge. Her self-interest and her focus both lie in saving, not spending.

Off the debt grid

When income stagnates, consumers are tempted, even encouraged, to take on consumer debt to spend money anyway, even if it means taking on debt. During the boom years of the 1990s and in the housing bubble preceding the Great Recession, they didn't need any encouragement (Figure 3).

After the crash, consumers ratcheted down on auto loans and credit cards. Auto borrowing has snapped back upward since the worst of the recession ended, but credit cards have not. Not evidenced in this graph, which begins in 2004, is that both auto loans and credit cards experienced their own steep climb throughout the 1990s.

Money is not free, of course. Consumer debt burdens in recent decades have cramped cash flow, reflected in the debt service ratio (Figure 4), which is the percentage of disposable income spent on debt payments.

The debt service ratio briefly jumped over 11 percent in the late 1980s before quickly crashing, but then it rose steadily to a 14 percent peak in 2007. Debt ratios ought to be closely tied to interest rates, but Figure 4 shows no connection. A steady collapse of mortgage rates over the past two decades did not prevent a steep climb in debt service beginning in 1995 and peaking in 2007.

Savings reached historic lows by 2007, recovering slightly after the crash. There is a tight coupling between personal saving rates and falling interest rates (Figure 5), though the cause and effect are not clear. Interest-rate drops generally appear to follow drops in savings rates, suggesting people are eating up savings because of a sour economy, which the Federal Reserve follows by lowering interest rates.

Still, it is not surprising people don't save when savings offer low returns.

The personal savings rate is calculated by taking disposable income and subtracting consumption. Anything not consumed is considered saved, including retirement savings. The savings rate also includes debt principal payments. So heavy debt burdens may actually lead to overstated savings.

Kayley Jones, of course, is completely off the debt grid. She has set aside a substantial portion of her earnings in savings, though with savings interest rates near zero, she is getting little in return. She might well be cheering for the Federal Reserve to allow interest rates to climb.

That makes her a bit of an oddity. It's a difference she can live with.

Email: eschulzke@desnews.com

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