Will the Rising Personal Savings Rate Boom the US Recovery?

Americans have been roundly criticized in the past for our low savings rate. Before this recession hit I'd hear and read articles on how "bad" the US was in comparison to other nations, how we had one of the lowest savings rates in the world, how we were addicted to debt in our credit cards and how this was going to hurt everyone one day. Well our debt culture has come home to roost now, but contrary to the obvious, starting to save now could be the wrong thing for the country.

It's true that our savings rate got dangerously low. From the 1950s to the 1980s the savings rate was typically 8-10%, rising as high as 12% in recessionary times. Then it dropped, reaching about 1% from 2005 on, and occasionally even went negative. But in November the savings rate grew to 2.8%, economists are projecting it to be 3-5% in 2009 (Goldman's projecting it to reach 6-10%) and this will be the sharpest reversal since WWII - makes sense given that the number of jobs lost last year is the largest since the end of the War.

The catch-22 of this situation is that improving our savings rate doesn't help the economy in the short run. Obama is trying to get a bill through to stimulate the economy with tax breaks and infrastructure projects to create jobs for the people who desperately need them, but it may not be effective if Americans save much of the additional income they receive.

We need to return to the values of living within our means and saving for the future - which the generation who grew up in the Depression learned so well. But to succeed this means we need to find a middle ground as a nation - to bring back a fiscally conservative culture and get away from the debt addiction, but at the same time put through a stimulus package to get money and jobs flowing again.

Comments

[NoCorporatePersonhood]

our whole economic system is based on "growth is good" and anything except growth is a negative outcome. This is an idea that you can't find anywhere in nature except maybe cancer.

[Kajur]

If I had money I'll be idiot if i save it.To lose 6-7% of it to inflation, which is much higher than government say? Be real.

[cayuse]

Private Savings: is defined as Corporate spending on capital equipment or holding cash. Or house hold purchase of homes.

None of this has happened or is happening. With the greatest profit 90% of money as been going into the hands of the Rich through Corporate Dividends and Traded Stock Appreciation being Reinvested or withdrawn at a measly 15% tax rate. Throw money at this Wealth Distribution and the rich get richer.

Yes large amount of money have been moved from the Stock Market into Savings and Treasury account. If you want to call he worker saving you are missing the boat.

There is no money in the hands of workers. You admit the worker has been living beyond his means. So how does he save now, when he has nothing but no or low jobs and debt.

DREAM ON! I see why no one has any answers. They cannot remember or observe nature.

[Antifascist-08]

Interesting post.

I understand that you get the ideas of saving and spending. to a point. I am just so tired of people going on various media outlets and encouraging the "citizens" to "spend, baby, spend." I find this whole attitude repugnant. Just mentioning it now, even with your caveats, is not a good idea, IMHO.

Its time we got out of this debt based economy. Now is the time to do move on to a more frugal and balanced way. Bush told the country to spend after 9/11, probably because he knew there would be a war to support. Talking heads on Wall St. shows bemoan the lack of spending every single day, hour after hour. This has got to stop.

People spend plenty when they have jobs and some semblance of security. If we are going to really CHANGE anything, we have to stop spending just to keep our economy growing. The idea that growth is the only way our economy can survive is one of the exact things that got us into this mess. The growth based, debt based economy is flawed and outdated. It cannot sustain itself.

We need a sustainable economy as much as we need sustainable energy and resources. This not the way. of course if all the rich folks who got all the money from previous years of unbridled spending want to spend their money, I am all for it.

[cayuse]

Blame the worker for spending all his meager earnings on living while the rich spend by reinnvesting traded stock appreciation in more stock. Except when capital gains is 15% and the pull their money out of the market. Then the market crashes. Then they reinvest for greater wealth on the ride back up. All for 0 growth to the economy. Result...U­S TODAY.

Fix: Redistribution of Wealth by rewarding workers for their contribuiton of labor and genius (not 10%, but 60%) Corporate Profit limited to 10%

[Mnemanth]

Hey there, Entrepreneur. People saving money only hurts...yo­u. Sorry, but people need to get to saving, or investing in themselves.
The message has been sent and picked up loud and clear: business, especially big business, thrives on the consumerism of the people. When business, again big business, can't manage themselves, they get a handout, paid for again by the people.
Take your high and mighty observations somewhere else.

[BARubio]

While I agree that we need to find a balance between spending and saving, it's not altogether fair to blame the current mess we're in completely on our spendthrift ways. Over the past 20 years or so, it has become harder and harder for the "average" person to maintain a decent debt/income ratio. Who among us has not felt that our income has not risen proportionately in relation to our expenses? Many people have had to live off credit cards just to make it to the next month, especially when they are between jobs. The middle class has really been bled dry.

Personally I think that people are waiting until the new administration is in and the dust has settled a little. We've been through some major shocks and are now in a new economic landscape. People will begin to spend a little more once they have a sense of what the ground beneath them is like.

[taikan]

People who "desperately need" the jobs created by infrastructure projects included as part of a stimulus package are unlikely to harm the economic recovery by saving too large a percentage of their income.

A stimulus package will result in "excess saving" (assuming that there is such a thing as saving too much on a personal basis) only if that stimulus package is designed so that it gives money, either through tax breaks or some other method, to people who don't actually need it.

[Realization]

We do need to save more and it won't necessarily stop the stimulus plan. Depends on degree of saving and what we are spending on. The more Made in America you buy, the better. Need to eliminate the trade deficit, too. Just saw that South Korea's LG Chem has announced a US$733 million investment plan to make batteries for the Chevy Volt. That could be the kind of thing we should make here instead of in Korea giving it a kick start with stimulus money. Suggest giving LG an "offer they can't refuse - junior partner JV with a U.S. firm, transfer the tech, and get tax breaks for a while, etc. The kind of thing they do to U.S. firms. Aim should be domestic supply of batteries for a new generation of enviro-friendly electric cars, tech dominance and exports. Pie in the sky? Well, ya gotta start somewhere. The domestic production should go with the GM bailout package. We need to direct money to investment for the long term. (LG thinks the global HEV and electric vehicle market is expected to grow by an average of 47 per cent annually, reaching US$2.3 billion in 2012 from US$510 million in 2008. Sounds good to me.)

[ReasonIsMyReligion]

It's "Doom." Sheesh.

[SoManyShoes]

Whether savings hurts spending is the wrong question. They are not mutually exclusive. Just because people are saving more, does not mean they are not spending – just spending less. Savings are critical; they support you if anything goes wrong. You need to survive the surprises life inevitably throws at you, like unemployment. Living within your means is much more important. Whoever you are, no matter how much money you make, more than likely, you’ll never have quite enough. As your income goes up, so do your expenses. Everyone wants more than they can afford.

So, in the long run people will continue spending. And, in the short run if they can pay down their debts – especially credit card debt – then they will be better prepared for the future.

[Antifascist-08]

Amen.

Stop spending for the economy's sake. Stop the madness.

[whatsittake]

Whether previously seduced into spending themselves into trouble and into investing in worthless (or destined to be worthless) situations, consumers/­investors/­citizens/v­oters must now take care of themselves because no one else is truly going to look out for them.

Saving is the right thing to do. Saving now and saving as much as they possibly can save. Cash is going to be the only thing of value in the short term.

But there will be a time to get rid of cash. Paper money will become worthless as the various attempts at rescue, recovery and bailout send the nation and the globe into a hyperinflationary disaster. Then saving will be useless.

Then those voices such as Penny Herscher will be telling us to save.

These are the voices of those who allowed the US to become a "service" economy, manufacturing almost nothing and requiring import of most of what we consume. US consumer spending is the major component of the US GDP, not manufacturing output.

They didn't look out for us then, they are not looking out for us now, and they won't be looking out for us when the US dollar becomes worthless. Do what is right for yourself, and the economy will take care of itself, just not as quickly as they would like. You will be in better shape financially for it. They always take care of themselves first and, often, last, too.

[wakupmagy]

I think your post is exactly right. It is beyond absurd to look to the very people who brought us to this brink to help us survive.
I know during a Depression "cash is king", but once rampant inflation comes, as you said--paper money is worthless.
I would like to know what you are doing in that regard. Are you buying gold?

Thanks for sharing your wisdom.

[Antifascist-08]

Excellent advice. Stop supporting the greedy bunch who got us into this mess. We have to get out of this "debt society economy."

[whatsittake]

Gold is being manipulated by the paper gold market (futures) to keep its price low. Yet if you try to buy the metal (coins, bars, etc), dealers and wholesalers are putting a stiff premium on the spot price and the the wait was 8-9 weeks on orders placed in early October.

But, I know nothing to provide the insurance needed against hyperinflation that gold does. I am trying to tap dance with currencies other than the dollar (but not in forex which forces one to be attached to a computer nearly 24/7), but all fiat money (paper backed by nothing) will eventually dissolve to essential worthlessness.

Treasuries were the next best idea starting 2-3 years ago but are now in a bubble that, even if the US Treasury does not officially default (I believe it is possible), locks the holder into extremely low rates while watching the principal evaporate when interest rates soar in the hyperinflationary surge. So, except for zero income short term treasuries, investments in treasuries will see the carnage stocks are seeing now.

I'm sure most think I'm crazy, but that's ok. I am trying to keep what I have, not make a fortune. So far, that's working. But, markets ( and the people that drive them) tend to make all decisions eventually hurt to some degree.

[drymartini1]

its not a persons duty to take care of nation's consumer spending. such baloney.

SAVE & INVEST for yourself. leave the spending on to your neighbours. jeez.

I hate it when even economists start this trend of "go out shopping". STOP SPENDING !! save and invest as much as possible.

you do not need a car every 4 years.
you do not need a 60inch plasma or for that matter 50 inch plasma.
you do not need to eat out more than 2 times a month !!
you do not need to buy retail. be it clothes or shoes.

[KrystynM]

Whoa, you don't need to buy clothing or shoes?

[drymartini1]

you need both. but dont buy from macy's or bloomingdales. shop at walmart, ross stores, payless shoes etc etc.

[melponeme k]

Are you insane?

The government is driving down interest rates to cover up the funny money floating around. The interest rates need to be raised, imports VAT taxed, off shore tax havens closed, tax breaks to business shipping off jobs ended and wars stopped. We need to get a hold of the money supply and begin cleanup.

That kind of action will hurt but not as much as if we allow the bottom to really fall out.

Not more debt.

[Antifascist-08]

Exactly. Spread the word. Don't listen to all the talking heads crying for more spending.

[WeTellTheTruth]

I think I will file this article under "the worse advise I've ever heard".

I will also file it in a new file I will call "the most convoluted logic in the history of mankind"

[ThePeacemakers]

All I can say is:
If jobs and wages were balanced, US citizens would be able to save and spend. Not one or the other.