Your Economy (No Politics)

[Bullwinkle]

Readers' Questions
Comstock Partners, Inc.
Thursday, February 9, 2006


Our readers often challenge us with interesting questions, and here are our answers to some typical queries.

Q.—Could you please explain something? My impression from reading various articles on savings rates is that neither the increase in home values nor the level of 401k saving are included in the calculation of the national savings rate. Is that true?

A.—The savings rate is consumer disposable income less consumer spending. Savings can only be derived from the percentage of goods and services that are produced but not consumed. If 100% of everything produced is consumed there can be no savings. Increases in asset values, whether real estate or equities, are not savings from a macro point of view. Contributions to 401ks that come from current income are savings. From a macro standpoint savings can only come from income while asset values come and go. This is neither a negative spin nor a maverick view of ours. It is standard economics, despite the propaganda and outright confusion seen in the media.

Q.—My records indicate that the Journal of Commerce (JOC) Index, year over year, is moving up and that spreads between the 10-year and 3-month yields are at spreads not seen since February 2001. To me, this is clearly a trend to be watched. Your comments please.

A.—The narrow spreads between the 10-year and 3-month yields are typical of a pre-recessionary period. The strength (until this week) in the JOC index is confirmed by every other commodity index, and historically has been a harbinger of generalized inflation. However, in the current case, there is also a strong pull toward deflation emanating from global labor competition and the increased availability of cheap goods from developing nations, particularly China. Essentially there is inflation in virtually everything China buys, but deflation in everything they sell. We think that the weakening U.S. housing market tilts the outcome to a global economic slowdown or recession and anther deflationary threat.

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