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Here’s some good news for a change. Americans’ personal savings increased from 3.9% in December to 5% in January.

From the BEA:

Personal saving — DPI less personal outlays — was $545.5 billion in January, compared with $416.8 billion in December. Personal saving as a percentage of disposable personal income was 5.0 percent in January, compared with 3.9 percent in December.

The fact that we’re rediscovering a virtue that our parents (or grandparents, for my younger readers) tried to instill in us is refreshing. There are some, however, who see a dark side to this development. Paul Krugman in the NYT today decries savings as the root cause of all the evils that have been visited on us.

And the saving glut is still out there. In fact, it’s bigger than ever, now that suddenly impoverished consumers have rediscovered the virtues of thrift and the worldwide property boom, which provided an outlet for all those excess savings, has turned into a worldwide bust.

One way to look at the international situation right now is that we’re suffering from a global paradox of thrift: around the world, desired saving exceeds the amount businesses are willing to invest. And the result is a global slump that leaves everyone worse off.

So does anybody know what might be the right thing to do: Spend like there’s no tomorrow, or sock that money away?

About the author: Tom Lindmark
Tom Lindmark picture
About a year ago, a company asked me to write a daily blog for them. I told them that I’d never read a blog and had absolutely no idea how to write one but sure, if you want to pay me for it, I’ll give it a shot. It was either my good or bad fortune to start at the beginning of the credit... More
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17
Comments on this article
  •  
    Don't worry, Mr. Lindmark. Whatever individual taxpayers are saving, Obama and the Democrats are spending and trillions more.
    2009 Mar 02 12:45 PM Reply
  •  
    "So does anybody know what might be the right thing to do: Spend like there’s no tomorrow, or sock that money away?"

    Neither. Simply live within your means and pay yourself first. All of this excess savings could mean there is consumer spending firepower waiting to be unleased or cash on the sidelines to be put back to work.

    2009 Mar 02 12:47 PM Reply
  •  
    You know, the more I've been thinking about it, I think "bubbles" are merely the "flip side" of the "Paradox of Thrift". The more I study economic history, the more I think that debt gets accumulated and decumulated ("paid off") in "herds". Everyone goes into debt simultaneously and they pay off those debts simultaneously. I simply don't think there is a way around this en masse, although clearly individuals may fall outside those constraints.

    The only macro-level cure I see is to wait it out until enough debt is paid down that the "herd" starts to accumulate it again.
    2009 Mar 02 01:10 PM Reply
  •  
    Recommendation:

    Read Peter Schiff's article from this morning ("Obama Placing the Economic Cart Before the Horse") to get a great perspective on savings as they relate to debt and the real economy (the one now hidden beneath overzealous government and the publics' financial ignorance).




    2009 Mar 02 01:24 PM Reply
  •  
    "So does anybody know what might be the right thing to do: Spend like there’s no tomorrow, or sock that money away?"

    Right for me, my family, or my kids, or right for the establishment, who is supposed to represent the "common good"?

    See, I have a moral dilemma here.
    2009 Mar 02 01:25 PM Reply
  •  
    Moral dilemma? Family first! Period! No dilemma!


    On Mar 02 01:25 PM APM wrote:

    > "So does anybody know what might be the right thing to do: Spend
    > like there’s no tomorrow, or sock that money away?"
    >
    > Right for me, my family, or my kids, or right for the establishment,
    > who is supposed to represent the "common good"?
    >
    > See, I have a moral dilemma here.
    2009 Mar 02 01:34 PM Reply
  •  
    Wow, Krugman is arguing against saving? Why is this even a debate?
    2009 Mar 02 01:35 PM Reply
  •  
    I can't imagine Krugman was doing any such thing. These tinkle down types are well known for quoting out of context in an effort to confuse the idiots.


    On Mar 02 01:35 PM DW wrote:

    > Wow, Krugman is arguing against saving? Why is this even a debate?
    2009 Mar 02 01:39 PM Reply
  •  
    Please tell us you're not one of those that will call the cops on your own family! The state (the gov't) never comes before family! NEVER!


    On Mar 02 01:25 PM APM wrote:

    > "So does anybody know what might be the right thing to do: Spend
    > like there’s no tomorrow, or sock that money away?"
    >
    > Right for me, my family, or my kids, or right for the establishment,
    > who is supposed to represent the "common good"?
    >
    > See, I have a moral dilemma here.
    2009 Mar 02 01:42 PM Reply
  •  
    The rate of debt and savings it's what worries me the most in this whole mess.
    If the real-estate market could stabilize in near term because it's indicators reached some preview lows, that's not what I could say about rate of savings that just started to grow recently and it's not even close to historical averages...
    I've looked recently at some indicators of debt and savings and from the evolution could take years to get there...
    The rate of debt it's just falling of a cliff and it reminds me of stock plunge.
    If it's not going to stabilize, consumer spending won't return to grow either and in this case there's no way GDP will have a steady grow.
    2009 Mar 02 01:56 PM Reply
  •  
    Even with the marked increase in the savings rate, it still is well below its average during the 1960's through the early 1990's (which looks to be @ 8.0 - 8.5%) as well as the long-term average since 1929 (@ 7.0%). Of course, what is more relevant at this juncture is the level to which it is ultimately headed. But for now, perhaps a slogan could be "this still isn't your grandfather's savings rate".

    America has enjoyed prosperous times during which the rate was much higher than prevailed from the mid-1990's until the collapse, so a low or negative savings rate clearly is not a prerequisite to economic growth. What is more important for sustainable growth is that people live within their means while at the same time, retaining optimism about the future. These conditions must be present. And who knows, by doing so and with enough time, we may even begin to reverse the current account deficit and underpin the dollar with sustainable strength.

    The reduction in the savings rate into negative territory in 2005 for the first time since the Great Depression should have signaled a harbinger of things to come for us all. Instead, we appear to have been collectively seduced by the Fed's apparent ability to indefinitely create soft-landings as well as the ostensible economic stability brought about by financially engineered risk dispersement instruments ("put the risk in the hands of those who can best manage it, thus increasing efficiency" was the mantra of the day). As these twin mirages have collapsed, we have no choice but to change our ways.
    2009 Mar 02 01:58 PM Reply
  •  
    Heaven, Hell, or Hoboken,

    Amen brotha!
    2009 Mar 03 12:31 AM Reply
  •  
    In all due respect you fail to see that the bulk of treasuries are purchased by foreign interests, and thus the money is plucked from air by this Bolshevik government.


    On Mar 02 01:01 PM timwalsh300 wrote:

    > Steve,
    >
    > The spending is not "trillions more" than people are saving. It's
    > roughly the same amount. You are failing to see that the money being
    > spent is the same money (savings) that people are pouring into US
    > Treasuries for a safe haven. It doesn't come out of thin air, despite
    > the popular belief around here.
    2009 Mar 03 08:53 AM Reply
  •  
    The Democrats' spending is indeed a tragedy, in light of the fiscal responsibility we've had from the Republicans over the last eight years.


    On Mar 02 12:45 PM Steve in Greensboro wrote:

    > Don't worry, Mr. Lindmark. Whatever individual taxpayers are saving,
    > Obama and the Democrats are spending and trillions more.
    2009 Mar 03 09:21 AM Reply
  •  
    It looks to me like people aren't 'saving' as much as they are 'deleveraging--paying down debts incurred during the fat times.

    That looks like savings in the statistics because those dollars don't re-enter the consumption side of spending--yet the deleveraging process will eventually lead to healthier personal balance sheets-- a 'very good thing,' as Martha Stewart would say.

    And perhaps, the American public will finally feel more free of an overburden of debt, and then become more comfortable with entering the consumption cycle again.

    But until the deleveraging process has run further (possibly until year end), consumption will still lag, and 'savings' will continue to rise.

    So, if I were investing, I'd go long on low-end retailers, hedged by shorts on higher end department and specialty stores. (That doesn't help my employment because I work for BBY, but reality is reality.)
    2009 Mar 03 01:50 PM Reply
  •  
    What are we saving for? 1% interest? When it was 4% I did not save so 1% will not change my way of thinking.
    2009 Mar 03 03:20 PM Reply
  •  
    Well, we've tried the spend - spend - spend paradigm for the last few years and look at the result. Maybe we should give save - save - save a try for awhile and see if it works out better. Couldn't be much worse!
    2009 Mar 03 06:13 PM Reply