Is Negative Savings Bad?

MSN Money has an article titled Is saving nothing a big deal? that raises some interesting points. Let's take a look at what experts interviewed in the article have to say.

That Americans have a negative savings rate is not in dispute. But Joel Naroff argues that spending wealth, like gains from an investment sale, skew the rate. He states that

The money I get from selling isn't income, it's wealth. I didn't earn it, I got it through my investments. If I spend that wealth, instead of having $10,000 in stock, I have $5,000. That means I have spent some of my wealth, not income. It's wealth I'm drawing down. It goes into spending but not income.

He argues that spending wealth is neither good nor bad - it's related to how you view the future. The biggest risk to the economy seems to be that spending wealth will not be able to be maintained (say when housing prices fall and the housing market cools) and consumer spending will fall along with it.

There seems to be some merit to that argument. If I sell a house and make a profit, taking out some of that money counts as spending, but not income (since, I believe, reported income is generally thought of as wages and salary). So if I spend wealth, my savings rate could be negative.

John Merrill, investment manager and founder of Tanglewood Capital Management in Houston looks at the question as one of how you measure your finances. If you look at your income statement, you may see a negative value at the end. But if you look at your balance sheet (your net worth). His take:

Are assets growing faster than liabilities? Then I'm worth more at the end of the year than at the beginning of the year. I'm making a net improvement. So what if I increase my leverage? I'm still better off than at the beginning of the year.

The risks here are increasing your debt to the point that making payments on it squeezes out spending for other things (like, say, your other bills). Economically, the more that goes to servicing debt, the less there is for consumer spending.

Tony Proctor, of Proctor Financial, sees another risk - leveraging houses to keep overspending. The risk here is that their lifestyles are too expensive to maintain into retirement. Housing prices may not go up forever, and sooner or later that spending will catch up with you. He also relates that many people just assume that they'll keep working into their 70s, but here too is a risk -

When you're 45 you're in the prime of your career and you're exactly the type of employee they want. By the time you're 60, you're lucky if you're not laid off. If you haven't taken a serious stance toward retirement savings, you're in trouble.

He suggests something that many, many financial bloggers suggest - saving at least 10% of your income. He doesn't count the emergency fund as savings, rather more like deferred spending.

What do you think? Is spending wealth the same as spending income? Why or why not?