Concern #1: Low U.S. Savings Rate

November 10, 2009

The United States is overly indebted at all levels, but this concern focuses on households.  Families think of savings as any change in wealth, including income that is not spent immediately but also capital appreciation of previously accumulated assets.  An economist’s notion of savings is deferred income.  Personal income not spent on consumption is saved.  In their aggregate, savings influence what is available domestically for business investment, and the size of the imbalance between savings and investment determines the directionality of capital flows with other countries and whether a country is in chronic current account deficit or surplus.

The U.S. savings rate ranged from 6.5% to 9.9% in the 1960s, 8.0% to 14.6% in the 1970s, 5.8% to 12.2% in the 1980s, and 2.0% to 8.9% in the 1990s.  Having plumbed below 1.0% earlier this decade, it recovered to a decade high of 5.9% in May 2009.  The problem with relying upon markets to do the heavy lifting of saving is that asset prices swing excessively up as well as down, and excessive bull markets do not persist forever.  Rather, things have a way of evening out, so a 16.9% per annum rise of the DOW in the 17-1/2 years between August 1982 and January 2000 is followed by a 1.4% per annum decline over the ensuing decade.  The destruction of wealth during the Great Recession created a powerful incentive for families to hunker down, rebuild savings and postpone consumption.  Equity prices have staged a surprising comeback this year, and the savings rates slipped back to 3.3% in September as well as the third quarter.  This remains unsustainably low and would prevent needed structural balance sheet adjustments.  Historically, a U.S. savings rate of 6-8% appears more normal.  A savings rate below 4%, in contrast, would not promote a sustained reduction of global current account imbalance and therefore leave the U.S. and world economies susceptible to future and potentially more cataclysmic financial meltdowns in the future than the one that began in 2007.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.


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