The third chapter of the new "Economic Report of the President" explains why the personal savings rate tells us little about personal savings.

First of all, savings is defined as income less consumption. Because such investments as home remodeling and college tuition are miscounted as consumption, they reduce the savings rate. Making a big down payment on an existing house lowers the savings rate, as does paying cash for a new car. Yet homes and cars are assets.

Second, corporate saving is also personal savings because stockholders own the corporations. When corporate profits are retained and reinvested, that increases assets per share and results in greater capital gains for 401(k) plans. Undistributed corporate profits accounted for more than 72 percent of total net private savings in 2004, when total private savings hit a record high despite a drop in so-called "personal saving."

Third, an increase in the value of old savings accomplishes the same thing as new savings -- it increases net worth. Yet capital gains are not counted as income or savings, so they are excluded from both the numerator and denominator of the savings rate.

Wall Street Journal columnist Greg Ip quoted Alan Auerbach of UC-Berkeley as saying, "It's too sanguine to equate capital gains with cash-flow saving -- they're not the same." This seems to suggest that a thousand dollars from writing a check on a savings account is somehow better than a thousand dollars from selling mutual fund shares.

"To live off capital gains," Ip explained, "a retiree would have to sell the underlying asset." Nonsense. Consumer spending is always financed by selling assets. Cash in your wallet and money in the bank are assets, just like stocks and bonds. Human capital (such as a new M.D. degree) is an asset that can be tapped by borrowing against future income. Income is simply a means of replenishing your assets, not a distinctly different way of financing spending. If the value of your stocks and bonds increases by 7 percent a year, you can sell 7 percent of your assets every year without reducing your wealth.

Because Ip assumes most household wealth is tied up in homes, he writes, "For many (retirees), selling their home is impractical." But you don't have to sell your home to spend a fraction of the equity. Just take out a bigger mortgage, a home equity loan or a reverse mortgage. If the cash withdrawn is no larger than the annual appreciation in property value, there is no reduction in wealth. Once you're old enough, there's nothing wrong with reducing your wealth (but heirs may disagree).

Last year's below-zero savings rate was: 1) partly a statistical illusion due to counting investments as consumption and ignoring corporate savings; 2) partly a sensible way to spread out the financial pain of surging energy prices; and 3) partly a rational response to the $5 trillion gain in household wealth.

I am not opposed to more saving, or to virtue in general. But last year's low personal savings rate was no "crisis." And the sensational analogy with 1933 was sensationally ridiculous.