Are Americans building a house of straw by spending more than they earn?

The US Department of Commerce recently released its monthly report on national savings for December 2005. For the first time since 1932 and 1933, Americans spent more than they brought in for an entire year.

What's going on? Well, a negative savings rate can be the result of spending savings from a previous period. Savings can also go negative if one makes a purchase of a durable good, like a car, and finances it.

The report does not include capital gains in the calculation of the savings rate. This could be the increased value of a home, or the value of a 401(k). Consumers can use these values as collateral in loans. The most common method is by refinancing mortgages. It appears that Americans are continuing to use their homes as piggy banks.

So what many would consider to be “savings” are not included. When I take a payroll deduction to invest, I would call that saving, but since I’m putting it at risk in the stock market, I really shouldn’t recognize it as savings.

The problem arises when one considers that 78 million Americans are nearing retirement. What happens when they start cashing out of the market to pay for their old age? What about when retirees sell stock to pay for health care? Or when their defined benefit pension plan goes belly-up because their former company’s stock goes down?

Americans will increasingly feel the gravitational pull of the Baby Boom generation as they age. Will the forces pull America apart, or will political leadership, regardless of party, act to save us?