Since debt and savings are opposites, you wouldn't expect them to move in the same direction at the same time. However, recent statistics indicate that as America's debt has shrunk, so too have America's savings rates.
The explanation may have less to do with the contrast between debt and savings and more with what they have in common.
The interest rate connection
Is it a contradiction that debt levels and savings rates are falling at the same time? There is actually a common thread behind these trends: low interest rates.
Recent low interest rates have helped Americans manage their debt burdens. According to the Federal Reserve, debt service ratios have dropped to their lowest levels since 1994. This is a function of both less debt outstanding and lower interest rates.
On the other hand, low savings account interest rates give people little incentive to save, and little account growth when they do save. So while it may seem strange that debt and savings are shrinking at the same time, the context of low interest rates helps explain why it's less of a contradiction than it seems.
Winning the debt battle?
Are Americans finally winning the battle against debt? There is still a long way to go, but there are some signs of progress.
According to Federal Reserve figures, U.S. consumer debt peaked in July of 2008 at over $2.58 trillion. It has since dropped by just over 5 percent, to $2.44 trillion.
In particular, Americans have attacked credit card debt, slashing the total amount outstanding by nearly 19 percent since it peaked in September of 2008. To some extent, people have replaced this debt with other forms of debt (typically loans), which has somewhat muted the overall impact on debt reduction. However, loan debt is more manageable than credit card debt, as it is typically carries lower interest rates and longer payment periods.
The most important point here is that after decades of steadily increasing their debt levels, Americans have succeeded in reversing the direction of debt accumulation--at least for the time being.
The other side of the mountain
Reducing their debt burdens is only half of the challenge Americans face. The other half is building up retirement savings.
In other words, it isn't enough just to be debt free; you have to amass enough money to retire on, and that takes years of saving. Many Americans are years behind schedule on this task, and current personal savings rates do not seem adequate to the task of playing catch-up.
After flirting with levels as high as 6.2 percent in parts of 2008 and 2009--the highest it had been in fifteen years--the personal savings rate has cooled off recently, falling to 4.1 percent in the third quarter of 2011.
In any case, even the 6.2 percent savings rate would not be considered very high by historical standards. According to figures from the Bureau of Economic Analysis, the division of the Commerce Department which measures savings rates, the personal savings rate averaged 7 percent over the 50 years prior to this one. Against that backdrop, even the recent high of 6.2 percent is below average, and the most recent reading of 4.1 percent is lackluster.
So while low interest rate policies have helped Americans with the challenge of reducing debt, it remains to be seen how long those polices--and Americans as a whole--can ignore the challenge of building up savings.
The original article can be found at Money-Rates.com: "Mixed messages: Debt falls alongside savings rates"