Appreciation is Not Savings

The fact that this article is the top hit when searching for americans savings rate on Google disturbs me. While the article is from 2000, the fact that enough people are linking to it to make it number one seems to mean that it's indicative of people's misconceptions about savings.

From the article:

On the other hand, the true wealth of people who have retirement accounts and money in private stock portfolios isn't reflected because capital appreciation isn't counted. So, even though the stock market has skyrocketed and your portfolio has grown, those gains aren't reflected. The personal savings rate also doesn't include home appreciation.

There is a very good reason why capital appreciation is not included in the savings rate: it does not represent deferred consumption. In order to realize any gains from capital appreciation, the capital (such as your house) must be sold to someone who can afford it and is willing to pay that much for it. So what, exactly, does Laura Bruce expect retirees to do? Sell their house and rent so they can afford to live? What does she expect to happen when baby boomers start all start selling off their stock at the same time to pay for their cost of living? Does she think all us GenXers are going to go into debt just to buy our parents' stock from them?

So, please continue to be alarmed by the low savings rate of Americans. That is all.

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eddie, ..We use money as an

eddie,

..We use money as an objective measuring stick to express values arising from individual subjective desires.

Not true. Values are fundamentally subjective and can't be measured. Money prices emerge from a market that is created by the interaction of the subjective values of individuals.

Regards, Don

Sean: In fact, it seems to

Sean:

In fact, it seems to me that the low savings rate is an excellent indication that the current high appreciation of assets is, in fact, part of a bubble.

Can you explain this? Why would a low savings rate indicate an asset bubble?

David, Zero-sum? Is

David,

Zero-sum? Is investing in a company that produces something zero-sum? Your investment-return income will be able to purchase more goods and services to choose in the future than it could today. Writ-large, it seems to me that investment that leads to new production gives everyone a little positive-sum. Stuffing money under the mattress and bringing it out 20 years from now, now that would be zero or negative-sum if everyone did it.

You didn't see my earlier comments :

"With a single qualification, both savings and investment are a zero-sum game....

The qualification is that the possibility exists that some investments may result in larger future supplies of consumer goods and services or in more highly valued ones."

At any single point in the future, a certain supply of consumption goods are available for purchase and a certain amount of purchasing power is distributed over the population. The actual amount of purchasing power denominated in money is of no importance. All that matters is its distribution. If your individual purchasing power is the result of hoarding away cash, or the result of investing in IPOs, it doesn't matter. What counts is your ability to command current consumption goods in the future.

It is virtually impossible to know where to invest a marginal saved dollar so that the future supply of consumer goods is enhanced. Even if you did know, the likelihood is that you are not the only one, and the investment might be so over-subscribed that it wouldn't even result in positive returns to investors even if completely successful. If it was known exactly where to invest, then a newly printed dollar would be capable of also producing the increase in consumer goods.

Overall the chances of a specific marginal investment producing an increased supply of consumer goods is infinitesimally small. The marginal investment may just as well reduce the supply as inferior competitors are allowed to survive longer.

Most successful investments made by the general public produce financial gains. These determine the distribution of the command of future consumer goods and services, but, by themselves, do not add to the size of the pie.

It seems likely that actual gains in future consumer goods and services are the result of new firms with a good idea, or the result of existing firms improving their productivity by re-investing their profits under the pressure of the threat of competition.

Regards, Don

Why is that an increase in

Why is that an increase in wealth?

The MacGuffin produces something of value: the pleasure of owning it. Let's say I value that pleasure at $100. Then you come by, see it, and decide that the pleasure of owning it is worth $150 to you. At that moment, the world's wealth has increased by $50.

Some people would use the word "utility" here. But we don't have to invoke something nebulous and hypothetical: we can measure it directly. Austrians call this "value" and reject utility in favor of it. Before you laid eyes on the marvelous MacGuffin, you had a certain amount of wealth, as did I. Afterwards, if I sell you the MacGuffin for $100, then I have lost something worth $100 to me and gained $100; my wealth hasn't changed. But you have lost $100 and gained something worth $150 to you; you've gotten richer by $50. If instead I sell it to you for $150, then I get richer by $50 and you stay the same.

In fact, even if I don't sell it to you, the fact that you would be willing to pay $150 for it means that I am $50 richer than I was before, because I *could* sell it to you for $150, either now or at some time in the future.

This isn't just an accounting trick. The only reason that anything is worth anything at all is because someone values it and is willing to exchange something they have (usually money) in order to obtain it. We use money as an objective measuring stick to express values arising from individual subjective desires.

Would this make more sense if I knew what a MacGuffin was?

Probably not, but fyi: The MacGuffin.

Haven't read the comments

Haven't read the comments but.. Assets can appreciate because the firm you are holding as an investment saves money it earned. In other words some portion of your asset appreciation can be due to savings.

Growth in population and

Growth in population and productivity

Well, yes. But where did the increases in productivity come from, if not from investment?

Brian- Unlike a firm, a

Brian-

Unlike a firm, a house doesn't save the money it's earned, though... A house that is not rented out is not making any money for its owner/inhabitants but is instead being used for shelter by the owner (a consumption process). I suppose you could think of the house as a capital good that is producing shelter constantly and while the price of this factor may fluctuate on the market, that price/market value is not present to the owner unless they sell it. Not selling your productive asset is not economically the same as actual saving, which is not consuming the full measure of your output (and leaving it in a form that can be used by others later).

Don, "Savings and

Don,

"Savings and investment is a zero-sum game, but one that everyone must play just to get his share."

Zero-sum? Is investing in a company that produces something zero-sum? Your investment-return income will be able to purchase more goods and services to choose in the future than it could today. Writ-large, it seems to me that investment that leads to new production gives everyone a little positive-sum. Stuffing money under the mattress and bringing it out 20 years from now, now that would be zero or negative-sum if everyone did it.

Brandon, Don: I think you

Brandon,

Don:
I think you significantly underestimate the effect of investment on growth. While it’s true that the average person has no idea how to choose profitable investments, it’s also true that the average person leaves it up to the professionals, who do a more or less acceptable job most of the time. If investment is a zero-sum game, then whence the tremendous economic growth of the 20th century come from?

Growth in population and productivity, and colored by inflation. There is no reason whatever that declining measures of GDP, etc., cannot be accompanied by strong improvements in real subjective standards of living.

Regards, Don

Eddie, ...The reason they

Eddie,

...The reason they aren’t savings is because you can’t expect them to retain their market value over the long term....

It sounds like you're describing Federal Reserve Notes.

Regards, Don

Why is that an increase in

Why is that an increase in wealth? Would this make more sense if I knew what a MacGuffin was?

Brandon: Appreciation of

Brandon:

Appreciation of homes (due to changes in demand) clearly does not count as savings. If there’s a rapid shift in demand for housing, the prices of houses will go up, even though there’s been no increase in total wealth. That’s not saving.

I have to disagree. Again, we have to distinguish between speculation and real appreciation. While I admit that there is probably speculation driving some of the current housing boom in some markets, I would argue that it's possible for homes to appreciate without speculation, and that such appreciation represents an increase in total wealth.

Suppose I own a MacGuffin. In fact, I own the only one in the world. I like it, but nobody else is particularly interested in it. From time to time, people drop by my house; they see my MacGuffin on display in the living room and say "Wow, cool! Can I buy it from you?" I keep turning them down, but over time more and more people drop by, decide they really like it, and make me an offer. In fact, the offers keep going up.

I claim that this is an increase in wealth, both for me personally and for the entire world. Even if I never sell it.

Housing is like that, too.

First, let's distinguish

First, let's distinguish betwen appreciation that reflects an increase in the underlying value of the asset and appreciation due to speculation. That said: asset appreciation that is not due to speculation *is* savings. This is true both at the personal level for an individual and at the aggregate level for an entire economy.

If housing is in a bubble, then no, the increase in your net worth from the increase in the market value of your house is not savings. Same thing with stocks. But the reason has nothing to do with "deferred consumption"; that's completely irrelevant. The reason they aren't savings is because you can't expect them to retain their market value over the long term. If they are currently in a bubble, then you know that over the long term their market value will fall.

But sometimes assets appreciate because they actually are worth more. Example: a company develops a new product that is very likely to increase their profits over the long term; their stock goes up, and your 401K just appreciated. If the rise in stock price matches the net present value of the discounted future profits from the new product, then the rise is due to an increase in the actual value of the stock, not speculation.

You can expect an asset that appreciates non-speculatively to hold its market value over time. That means you can count on being able to sell it sometime later and get your value from it. It counts as savings, just as much as if you had forgone some consumption and stuffed the cash you saved in a mattress. Either way, at some time in the future, you can be confident that you will have a certain amount of money available to you, either by extracting it from your mattress or by selling your stock.

At the aggregate level, savings is just another word for the accumulated capital stock, i.e. the ability of the economy to produce goods and services. If the economy is able to produce more goods and services, then the capital stock is worth more; the economy has built up "savings". Since the capital stock is worth more, the components of the capital stock (houses, stocks, natural resources, etc.) will go up in price, i.e. will appreciate.

Brandon: Great comment. If

Brandon: Great comment. If someone chooses a good stock and it goes up a lot relative to the market as a whole, they could certainly consume more than someone else who chooses a not-so-great stock. My main point is that it doesn't make sense to say that it's OK that Americans are saving -0.8 to 1.5% of their income rather than the historically usual 7-10% just because their assets are appreciating more than usual. In fact, it seems to me that the low savings rate is an excellent indication that the current high appreciation of assets is, in fact, part of a bubble. Saying "low saving is OK because assets are appreciating a lot" is almost exactly the opposite of the truth. It should be "asset appreciation shouldn't be counted on because savings is low."

A rising tide lifts all boats, and in this case the mistake is that people think they no longer have to maintain their boat because it's somehow risen above the water.

Appreciation of homes (due

Appreciation of homes (due to changes in demand) clearly does not count as savings. If there's a rapid shift in demand for housing, the prices of houses will go up, even though there's been no increase in total wealth. That's not saving. However, appreciation of equities can, to some degree, be considered savings. If a stock goes up as the result of a speculative bubble, that's not savings. But appreciation as a result of retained earnings is. If a corporation invests its profits instead of distributing them to shareholders, that's deferred consumption.

The reason we don't count retained earnings as personal savings is that they're already counted as corporate savings. It's important to remember that personal savings is only one of three components in net savings. The third, of course, is government savings (or, more commonly, dissavings).

Although personal savings are down, corporate savings are up, so net private savings are actually not in terrible shape (about $500 billion in 2003---not great, but not a national scandal, either). Note the antagonism between the two. If corporations choose to retain earnings, they count as corporate savings, but if they choose to distribute them and investors reinvest them, then they're personal savings. This is pure speculation (no pun intended) on my part, but it looks almost as though corporations cut back on distributions in anticipation of the dividend tax cut.

Anyway, the real drag on the national savings rate is government dissaving. Although net private savings were $502 billion in 2003, total savings were only $134 billion due to a $368 billion government deficit.

Don:
I think you significantly underestimate the effect of investment on growth. While it's true that the average person has no idea how to choose profitable investments, it's also true that the average person leaves it up to the professionals, who do a more or less acceptable job most of the time. If investment is a zero-sum game, then whence the tremendous economic growth of the 20th century come from?

The problem is that

The problem is that Americans are not really deferring consumption just because they don't sell their house now to take profits. They're living high off the hog thinking they don't have to save due to the fact that their house is worth so much. The same applies to whatever mutual fund they have.

Mark: You are correct that as baby boomers retire and they are attempting to purchase goods and services at the same time available labor is decreasing prices will increase. This is all the more reason why people need to be putting away part of their income, not just relying on appreciation of their house and mutual funds to get them through retirement. However, on the bright side of things a lot of the retiring baby boomers will be retiring from obsolete union jobs and will probably be replaced by cheap immigrant labor and robots, so it's likely that the effect of rising prices will be minimal compared to the fact that the later retiring baby boomers won't be able to get as much money for their stocks as they expect.

I don't follow your

I don't follow your logic.

You say that depending on the stored value in a house is bad because to actually use the value for, say, food, one much sell the house. True. However, if one stores value in stocks, one must sell the stocks to buy food, so the result is the same.

"Ah", you say, "but you do not need the stocks to live, but you do need the house". Not quite true: you need USE of the house, you do not need title to the house. Reverse mortgages are very popular, and are a fine and useful instrument. Start selling off a certain percentage of your house each year for cash, but retain ownership until the entire thing is sold off: the perfect solution.

You then argue that counting appreciation in stock is bad, because when the stock is sold, the market crashes. However, you're conflating two things: this is an argument against storing value in stock, NOT against considering that appreciation is wealth. Consider someone who defers consumption, thus generating cash, and then invests the cash in the stock market: your same argument applies.

Or, let's simplify this one step: consider someone who just saves cash. Imagine that he and his cohort retire, en masse, and begin "selling" cash for medicine and healthcare. Is there not the same glut on the market as before (except this time, of money, and not of stock)? Does the value of the dollars not deflate the same way that you argue the value of the shares would deflate?

Sean, If you earn 1% in a

Sean,

If you earn 1% in a savings account and can borrow your brains out why would you save? Let's wait and see what American's savings rates are when interest rates go back up.

Greenspan kept rates ridiculously low for too long and now the long end does not respect him.

Patrinator: I completely

Patrinator:

I completely agree. The low savings rate is an excellent indicator that interest rates are being held too low. However, "but rates were so low!" isn't going to go far when the younger baby boomers have to work an extra several years before they can retire.

a few years ago, my dad had

a few years ago, my dad had the opportunity to plunk down 30K for a new car, in cash. He decided against it, and chose instead to finance it over 3 years. The reason behind it?

He was earning about 8%/yr in his mutual funds, and General Motors was only charging him 1.9% to borrow the money. So, in the interim he was earning interest on the money that he would've used to purchase the car. Seems like a no-brainer to me.

But, on the other hand, if you are only earning 1%, and it's costing you 12% to borrow money, (regardless of your creditworthiness) I'd say your probably foolish to borrow too much money, especially if the bulk of your purchases are not durable, appreciating goods. Most aren't.

It's true that appreciation

It's true that appreciation is not savings. But appreciation can be reaped (if you don't get caught in a bubble-burst), and that's what a lot of folks are counting on. The baby-boomers won't all retire at the same time, and so the market for stocks will remain quite liquid because the baby boomers who haven't yet retired, plus baby boomers' children and grandchildren, will continue to buy stocks for their retirement, and so on. The real price of stocks has been on an upward trend since the stock exchange opened for business, and there's no reason for that underlying trend to change unless economic growth flattens or turns negative. As for housing, retirees can downsize when they retire, and many do so. Home equity can indeed be cashed in and used to support one in retirement.

By this argument, there is

By this argument, there is no such thing as savings. In order to realize any use from the currency saved in your mattress, you must convince someone to trade you a good or service for that money. The uncertainty of the value of that savings is only different in degree from that of a house or stock share.

What you can expect to get when you sell your house and what you can expect when you close a bank account are not different in any qualitative sense - the house value is more uncertain by some measures, but it's certainly not zero.

If you want to talk about deferred consumption, I believe that correctly-estimated appreciation (i.e extractable dollar value) qualifies as much as cash does. How is it different if I decide not to go to aruba because I don't want to sell my share of a nicely-appreciated company from deciding not to go because I don't want to close out my savings account?

Sean, If you're disturbed by

Sean,

If you're disturbed by an article's high Google rating, I suspect that linking to it might not be the best way to react.

Mark, By this argument,

Mark,

By this argument, there is no such thing as savings. In order to realize any use from the currency saved in your mattress, you must convince someone to trade you a good or service for that money. The uncertainty of the value of that savings is only different in degree from that of a house or stock share.

With a single qualification, both savings and investment are a zero-sum game.

First of all, all that matters overall for a future standard of living is the total future supply of consumption goods and services.

No matter how you accumulate future purchasing power, you will end up competing for a share of whatever consumption goods and services then exist. Prices must adjust to balance future supplies of goods and future purchasing power.

The qualification is that the possibility exists that some investments may result in larger future supplies of consumer goods and services or in more highly valued ones.

However, the vast majority of people cannot possibly make effective choices between investments that increase the future supply of consumer goods and services, and those that do not.

Even worse, higher levels of investment may well impede those investments that actually can increase future supplies by competing with them for needed factors of production.

Savings and investment is a zero-sum game, but one that everyone must play just to get his share.

Regards, Don

Values are fundamentally

Values are fundamentally subjective and can’t be measured. Money prices emerge from a market that is created by the interaction of the subjective values of individuals.

True enough; I was a bit sloppy in my terms.

I still contend, though, that in my example above, value is created when someone sees the MacGuffin for the first time and decides it is worth a certain price. And if that price is higher than any previous price, wealth has been created as well.

So too with housing.

My main point is that it

My main point is that it doesn’t make sense to say that it’s OK that Americans are saving -0.8 to 1.5% of their income rather than the historically usual 7-10% just because their assets are appreciating more than usual.

I don't know what's OK, but I cannot blame people (including myself) who prefer saving in ways that they think have a higher expected future value than what the Commerce Department counts as "personal savings".

I somewhat agree with the article which disturbs you. I think the Commerce Department's method of calculating savings underreports the real wealth being created in this country that is reflected in capital appreciation.

Here's a few strawmen for you to refute: Are you saying than an individual is somehow better off if they put cash into a savings account (counted in the savings rate) than they would be if they make an extra principal-only mortgate payment (not counted, as I understand)? Are you saying that there is a material benefit to an individual who cashes out a highly-appreciated stock (which virtual income was unspent, but not counted as savings) and puts the resulting cash into a cookie jar (which is counted as savings, since the realized gain is income)?

still contend, though, that

still contend, though, that in my example above, value is created when someone sees the MacGuffin for the first time and decides it is worth a certain price. And if that price is higher than any previous price, wealth has been created as well.

certainly you'd need to amend this to reflect that person's ability and willingness to pay. Nevertheless I'd still contend that the value is within the product itself and that price is changed when someone decides to pay more. The value may have appreciated independently of the price change, sure, but things are either true or they aren't- your way of thinking is a bit tautological and would conceptually disprove a bubble, as nothing can be overvalued if, hey, someone payed that much for it. So, according to your theory, the tribe that sold Manhattan for beads did not "overvalue" the beads, because they paid that much for them.

My main point is that it doesn’t make sense to say that it’s OK that Americans are saving -0.8 to 1.5% of their income rather than the historically usual 7-10% just because their assets are appreciating more than usual.

no it doesn't unless they're actively liquidating those assets (and thereby the assets are ceasing to become assets as we're discussing the concept) because asset valuation can radically change and you could lose everything. Sure, the value of money could radically change as well but hold all your stuff in tangible gold then.

Are you saying than an individual is somehow better off if they put cash into a savings account (counted in the savings rate) than they would be if they make an extra principal-only mortgate payment (not counted, as I understand)?

they would be better off, for the above reasons. They should liquidate their major assets (to about 80% in the case of a house) and keep the money in a tangible investment they feel is secure. The worst that'll happen if the bubble breaks (or if terror strikes, etc.) is that they might get voluntarily foreclosed upon, but they'll still have a big nest egg.

Matt

Brian: Savings is ... real

Brian:

Savings is ... real capacity left over after consumption that can either be used for consumption later or in more round-about production processes to also allow for greater consumption later.

Where is the missing link between what's good for an individual (who can't distinguish between "savings" and "unspent appreciation") and what's good for a group of individuals (on which you're basing the distinction)?

I claim that if an asset has appreciated, it's BECAUSE it represents more capacity for future consumption. I'm having trouble imagining an estimate of future consumption availability that diverges from the estimate of future value of assets.

Brandon:

Also, if house prices rise 25%, that doesn’t mean that everybody can sell his house for 25% more. It means that the last person who sold his house sold it for 25% more. If everyone tries to sell his house, prices will drop very quickly.

A 25% rise in housing means that everyone is living in a house that's 25% more valuable compared to other things they could have instead. Couldn't you apply the same argument to "savings"? If everyone saved 25% more, and tried to all spend it at the same future date on the same items, the price of those items will rise.

To the extent there is an impasse, I guess I'm on Eddie's side. I distinguish between use value and exchange value, but it seems like the exchange value exists solely because it is someone else's use value.

Hah, yes, I only caught the

Hah, yes, I only caught the last bit as I was searching for the beginning of Brian's argument with Eddie. My fault.

So do you think that the inferior company effect is nearly as strong as the innovative company effect? Is there any inherent reason to believe that one is stronger than the other? Would we have to know how long people keep investing in non-productive companies and how many successful entreprenuers it takes to wipe out the losses from bad choices?

I agree with you that the chance of a marginal investment making a difference is small (especially a non-risk taking, passive investment). But perhaps big picture thinking, for a moment, is necessary here? I look at the pie and see that it has been growing for a long time. I could be wrong, but that leads me to think a.) deferred consumption, in any form, leads to a greater choice of goods to choose from, thus less competition and a general welfare improvement and b.) investment has played some part of that growth, how much?

Eddie, We are thus at an

Eddie,

We are thus at an impasse. I do not accept a conceptual position that cannot distinguish between possessions and economic assets, nor distinguish use-value and exchange value.

A house's use-value is generally unchanged by a rise or fall in its exchange-value on the market; should the market arbitrarily collapse the price of my house to a nickle, the physical properties of my house have not changed. It still keeps out the rain & elements as well as it did yesterday when it was worth hundreds of thousands of dollars on the market.

I also do not accept definitions of "revenue" that have no appreciable connection to actual revenue (that is, economically relevant commodities and/or claims on goods and services that flow into one's possession). The joy I have in possession a football signed by the '99 VT Football team is not revenue in any meaningful sense, neither is the use-value I derive from my refrigerator or TV. The money I receive bi-monthly from my employer *is*.

Brian, Your house is not an

Brian,

Your house is not an asset if it is not generating, generating income.

It doesn't have to be generating cold hard cash to be an asset. It generates shelter and storage, which have some value to you. You consume all of the value it generates, but it still produces something of value, making it an asset.

My MacGuffin story was trying to make the same point: a consumer durable is an asset; even a useless trinket is an asset. The "revenue" that they generate is the continued use of the object (for a car or a fridge) or simply the pleasure of ownership (for the trinket). While not monetary, those are still valuable. If they weren't, you wouldn't pay money for the things that produced them.

Savings is not accounting tricks but ultimately (in the economic sense) real capacity left over after consumption that can either be used for consumption later [..]

That's exactly why I view asset appreciation as savings: the appreciation is an increase in real productive capacity. When a house appreciates the shelter and storage it provides is more valuable. That capacity to produce something of increased value is an increase in productive capacity. The house produces more; you consume all the extra it produces, but its productive capacity has still grown. Ego, savings.

Maybe the question should be

Maybe the question should be “why the obsession over the word ’savings’"? Why would anyone care if an asset they have was saved, earned, gifted to them, or found on the street?

I don't care about the savings rate because I care about perfect strangers as individuals and want them to be well off in their retirements. I care about the savings rate because it measures changes in the capital stock, and I want the capital stock to grow so that standards of living will rise.

If my assets appreciate and I can sell them at a profit, that's all well and good for me. But it doesn't contribute to the capital stock. It's a zero-sum game. I get more because someone else pays more. If I pay down my loan early, then I'm adding to the capital stock. The bank has more money to lend because I gave my money to it instead of using it for consumption.

Also, if house prices rise 25%, that doesn't mean that everybody can sell his house for 25% more. It means that the last person who sold his house sold it for 25% more. If everyone tries to sell his house, prices will drop very quickly.

Eddie, That's just it. Your

Eddie,

That's just it. Your house is not an asset if it is not generating, generating income. If you're not renting it out its a consumer durable, a possession that has some market value (such as if you sold your refrigerator on eBay or whatnot) but that nevertheless is not an asset. It neither generates revenue nor is a claim on revenue.

Dagon,

That is a good point, one I think Don gets to with his parsings. Savings is not accounting tricks but ultimately (in the economic sense) real capacity left over after consumption that can either be used for consumption later or in more round-about production processes to *also* allow for greater consumption later.

Paying down your house more

Paying down your house more quickly can most certainly be counted as savings. However, it would be unwise to count your equity as savings and take it as an indication that you don’t have to continue to pay down the house or put money away in some other form.

This is exactly the idea with which I disagree. Either value stored in home equity is savings or it is not. Saying that it's savings if I made an extra payment but it's not savings if it appreciated by that amount makes no sense to me.

In either case, that equity increase is an asset that I own, which has some uncertanty as to the amount of goods and services I will be able to convert it into at some future date.

Maybe the question should be "why the obsession over the word 'savings'"? Why would anyone care if an asset they have was saved, earned, gifted to them, or found on the street?

Brian, The increase in

Brian,

The increase in saving when your house appreciates isn't due to the house making more shelter and storage than you consume, the way that you might save by making more money than you spend. You obviously consume all the shelter and storage that the house produces. The increase in saving comes from the asset appreciation of the house.

Saving isn't just what you make minus what you spend. Saving is the delta in your net worth. Assets count.

Matt, Nevertheless I’d

Matt,

Nevertheless I’d still contend that the value is within the product itself and that price is changed when someone decides to pay more. The value may have appreciated independently of the price change, sure, but things are either true or they aren’t

I disagree. There is no value inherent in an object; value arises only when a person wants the object. People's desires change, and as they do the values of the things they desire change as well.

your way of thinking is a bit tautological and would conceptually disprove a bubble, as nothing can be overvalued if, hey, someone payed that much for it.

Even with a completely subjective view of value, there can still be bubbles and people can pay too much for something. The key concept is speculation. The non-speculative price of something is what someone would pay to own it for the sake of owning it; a speculator is willing to pay a price higher than that in the hope that the price will rise even more and he can sell it later for a profit.

A little speculation is good; it makes markets liquid. But it's possible for speculation to cause bubbles.

Getting back to Sean's original post: I think people are reluctant to apply the label "saving" to things like gains in housing equity and stock portfolios because they could be entirely illusory. If we're in a bubble, then we might wake up tomorrow and find it all gone. But from an economic standpoint, the only difference between a stockpile of grain, money in a cookie jar, your savings account at the bank, your brokerage account, and the equity in your home is that the latter two might evaporate if the market is overvalued and the bubble bursts.

That's why you have to distinguish between speculation and real appreciation. Once you do that, then contrary to the title of this thread, appreciation *is* savings.

Eddie, WHat is a house's

Eddie,

WHat is a house's output? Simply shelter and a place to put your stuff. How does one save the "excess" of that for use in the future?

Brian (Doss), Not selling

Brian (Doss),

Not selling your productive asset is not economically the same as actual saving, which is not consuming the full measure of your output (and leaving it in a form that can be used by others later).

How is it economically different? If saving is as you describe, then a farmer can only save when he stockpiles grain, a shoemaker can only save when he fills his shop with shoes, and anyone in the service industry can't save at all. That's obviously not what you meant; you must be considering *money* as an acceptable form of saving.

But if saving is accumulating grain, or accumulating money, why can't it also be accumulating other kinds of assets that have and retain value (such as productive assets, like houses)? What do grain and money have in common that houses and equities don't?

Eddie: Low savings tend to

Eddie: Low savings tend to be a result of a) low interest rates, which tend to lead to inflation of prices of assets that tend to be purchased on credit like houses and cars, and b) people's belief that they don't need to save because they can borrow (or owe money) and their assets are appreciating. Both of these are hallmarks of an asset bubble.

Mark: The title of the article is not "Anything That's Not Counted by the Commerce Department in the Personal Savings Rate is Not Savings," it's "Appreciation is Not Savings." Paying down your house more quickly can most certainly be counted as savings. However, it would be unwise to count your equity as savings and take it as an indication that you don't have to continue to pay down the house or put money away in some other form. Same holds true for stocks. I'm sorry if I sounded like I was saying otherwise.

Since interest is not generally considered savings, why should appreciation be?

This discussion is great

This discussion is great because it really frames the confusion around this whole issue.

How about this: interest paid on a savings account is not considered savings, so why should asset appreciation? On a savings account, it *can* be considered income because it doesn't go away (barring the effects of inflation or bank failure). However, increases in asset value are not considered income in the way i.e. dividends are until they are realized, at which point they are income and if they are not spent are considered savings.

So there you have it. Appreciation becomes savings when it is realized but not spent.