Consumption: the Key U.S. Imbalance
November 26, 2008
It is imprudent to spend everything one earns. It’s a lesson taught young-aged children in the lyrics of I’ve Got Sixpence. Think of the two pence that gets lent as the portion being saved or invested.
I’ve got sixpence
Jolly. jolly sixpence
I’ve got sixpence to last me all my life
I’ve got twopence to spend
And twopence to lend
And twopence to send home to my wife-poor wife.
The savings rate in the United States historically runs around 6-8%, and that is less than the traditional savings rates found in Asia and Europe. In the early 1990’s as the United States was emerging from recession, the savings rate started to shrink very gradually. Wealth to be held for a rainy day, to fund a child’s education, or ensure a happy retirement no longer accumulated in the old-fashioned way by deferring consumption. Escalating property values and financial asset appreciation shouldered the task effortlessly, and when that was not sufficient, households borrowed to boost immediate purchasing power. For about two years into 2006, the savings rate swung into the red. It was negative 0.7% of income in October 2006, +0.5% in October 2007, and still just 0.6% as recently as August 2008, a month before the Lehman failure. The flip side of debt deleveraging is a rising savings rate, which today was reported as being 2.4% in October. Trend changes like this usually overshoot. Before stabilizing, the savings rate is likely to exceed 8%. The faster the adjustment occurs, the more deeply will consumption and GDP fall away, but the good news would be that the adjustment might be more compressed in terms of duration. A higher U.S. savings rate will curb but not nearly eliminate the dependency on foreign capital inflows. Importantly, it will create a situation that could be sustained in the long run. That’s a start to getting past the current crisis.
Tags: Dollar
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Very interesting. I would love to see historical savings rate data if it’s freely available.