The Underlevered American Household

The topic for this article came about when I was talking to my research assistant about the state of the economy and this ugly market.

He asked why it should go up and claimed Americans have no money. My rebuttal was that Americans have more money then ever.

But as will happen in most great office debates, we were both talking without evidence, so we decided to look up some statistics to see if either of our assumptions was, in fact, true.

On the face of it, things are not pretty.

For the first time since the Great Depression, the U.S. has a negative personal savings rate.

What does this mean? It means that according to the way economists working for the government calculate income and expenditures, we are spending more than we make.

And we can all agree that the chart below is a pretty ugly picture.

But then I looked beyond the picture, and while I hate to be the Dr. Feelgood all the time on the markets, the bottom line is this: If you want to look at the following chart and be depressed, then be my guest. But it's better to take up sports or exercise and be a little happier because the chart is mostly useless.

For one thing, capital gains are not included in personal income. However, capital gains taxes are included as expenditures. So, if you sold your house last year for a nice profit, as many people did, and rather than buying another house, you put all that money toward mutual funds, taxes, etc., then you are showing negative personal savings. BAM!

I don't know what else to say about that one, except this: If you buy a car, the entire cost of that car counts as an expenditure, even if you got a "zero interest, no payments till 2007" sort of loan. Not really a fair way to calculate expenditures in my opinion.

Based on these calculations, now that the cycle of low interest rates and massive housing and automobile purchases is over, we will see a sharp drop in the expenditures side of this equation over the next two years.

Perhaps more disturbing is the fact that household financial obligations, which looks at all monthly payments as a percentage of disposable personal income, are at a 26-year high. Again, personal income here does not include capital gains increases, but still, we'd like to see this number lower.

Financial Obligations Trouble Obligations being at a 26-year high is more worrisome than the savings rate

Source: Department of Commerce

Household Debt New spending habits need to be considered

Source: Department of Commerce

Both of the above charts, showing credit-market-debt outstanding is increasing, as well as the financial-obligations ratio below, need to be looked at in a new light because spending habits have changed. Most people now, as opposed to 10 or even five years ago, put almost all basic expenditures on credit cards.

There are several reasons to do this (and I know because I do this). My American Express bill contains basically all of the monthly expenditures for my family and makes it easier to understand what our expenses are by category. Also, for tax purposes, it's easy to track all the expenses, as opposed to saving receipts for everything when you get it all on one bill.

I believe this shift in how we spend money and use our credit cards (10 years ago, most people in their early 20s did not even have credit cards, for instance) is more a factor here than people realize.

Liabilities Need Balance Household assets put the debt in perspective

Source: Department of Commerce

And finally, there's the federal debt. The fact that foreigners hold so much of our debt has been worrisome to investors. Two trillion dollars is a big liability. Or is it?

Like any balance sheet, debt is only one side of the equation. The other side is assets. In 2000, the total assets of U.S. households were $49 trillion. Right now they're $66 trillion, an increase of 33%. With $66 trillion in assets, handling the $2 trillion in debt is not a big deal. If anything, we should probably do as any activist fund would admonish a company to do -- lever up and invest more in ourselves.

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James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of Trade Like a Hedge Fund and Trade Like Warren Buffett. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback; click here to send him an email.

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