Actually, Americans Are Not Saving Yet

There seems to be much confusion lately about the consumer’s increased savings rate and if this is a good or bad condition for the health of the U.S. economy. While many Austrian economists are lauding our new found predilection to save, the Administration is obsessing over forcing banks to increase lending and compelling consumers to step up their borrowing.

It is factually correct to believe the U.S. consumer must embark on a protracted period of savings and reduced consumption in order to reconcile the decades of imbalances encouraged by the Fed and banking system. Unfortunately, the very idea of a newly-frugal consumer is a complete farce.

According to the Bureau of Economic Research, Americans saved 1.8% of their disposable income in 2008. That equates to a total savings of $191.4 billion. And in another seemingly encouraging sign, consumers saved at an annual rate of 4.4% in January and at a 4.2% annual rate in February 2009. At the current pace, consumers would save $464.4 billion in this year. This has caused some economists to take heart that the excess consumption patterns of the past few decades have begun to reverse.

However, the problem is that at the same time our government is busy ensuring that any private sector saving is more than offset by increased public debt. In 2008, the budget deficit was a then-record $438 billion. This year the budget deficit is projected by the Congressional Budget Office to be $1.8 trillion—a four-fold increase!

Thus, as a nation we have not saved a nickel. What most economists overlook is that all public debt is a direct obligation upon the consumer, meaning taxpayers—a much smaller universe than consumers, mind you—saw their debt burden increase by $246.6 billion last year and will watch it skyrocket by a projected $1,335.6 billion this year alone!

What makes today’s policy course such a travesty is that our government is creating this record-shattering debt in order to increase bank lending and to specifically reverse the positive recent trend in consumer savings. Thus, the Obama Administration is seamlessly taking the baton from the Bushies and is even more aggressively seeking to borrow our way out of debt and print our way back to prosperity.

As long as savings is viewed as the problem and consumption is viewed as the solution, there we will be no escaping our economic malaise. Consumers may have finally begun to repent for their profligate ways, but as long as government annuls that effort we will still face all the ravaging effects from onerous debt.

Our nation’s debt now stands at over $11 trillion, with CBOE estimates suggesting it will grow by another $9.3 trillion over the next ten years. That is the perfect condition to engender yet higher rates of unemployment, along with increasing tax and interest rates.

After the short-term euphoria wears off from the Obama stimulus packages, we’ll be left to discover that we’ve not only squandered even more current and future savings, but that we have cooked up the perfect recipe for stagflation.

Comments

[Paul in Texas:]

You've wonderfully stated the problem, now what can we do about it?

Apr 01 09:14 AM

[Dave Wrixon:]

You'll be fine as long as those investing in dollar assets don't catch on to the fact that they are paying into a Ponzi Scheme. Should that happen then you are toast.

Apr 01 09:31 AM

[drevno:]

Although we are in the midst of some very nasty mess and some knee-jerk actions by the Fed and other central banks of colossal proportions, the era of unbridled money creation by the governments to counter the shadow banking practices is probably coming to an end. Let's hope so.

Once this bailout and stimulation bubble is over, there's good probability that the sounder economic principles will again prevail. And that means that saving will be a virtue, because it allows/balances investment, and the governments will have to return to gradually balancing the budgets. That's good. But what's not so good: it might take 2-3 or even more years to have a real positive effect.

Things that may derail these efforts could be over-stimulation of the economy, trying for unsustainably high growth rates in the long term, not letting the housing market find its naturally clearing price level, or relying on some external factors to do the trick. We should aim for less rapid but more sustainable path to prosperity for all concerned.

Apr 01 10:00 AM

[Jason Z:]

Sometimes you have to sacrifice in the short term to gain in the long term, or that's what Obama said.

Apr 01 10:07 AM

[friar tuck:]

are all the voluntary contributions to 401s, iras, 403s, etc. NOT considered saving? aside from the obvious (liquidity) what is the difference between a savings account and having $100.00 per week deducted from your paycheck with employer matching? am i missing something here on just what is considered savings because everybody and their brother has one of these accounts. please enlighten me.

Apr 02 09:25 AM

[oldfolkdancer:]

When serious inflation comes to the US (and I really think it will) savers will be punished. I've acted in this bad movie before in the seventies. If you are debt free and have spare cash spend spend spend. Buy some jewelry, nice furniture, remodel your kitchen, get a nose job, whatever. Everything is going to cost lots lots more.

Apr 02 11:07 AM

[kelm:]

I completely agree but must add that it is the total US debt that is the true impairment on the economy, not simply the Federal debt. In that light the policy is even more difficult to accept. Let's get all elements of the economy borrowing more and increasing the total debt to gdp at an even faster rate so we can go bust in a more spectacular and permanent fashion.

Anything worth doing is worth doing with gusto!

Apr 02 11:32 AM

[shootpar2001:]

Yes,
....but it pales in comparision to what we are letting the politicians spend!!!!!!!!!!!!!!



On Apr 02 09:25 AM friar tuck wrote:

> are all the voluntary contributions to 401s, iras, 403s, etc. NOT
> considered saving? aside from the obvious (liquidity) what is the
> difference between a savings account and having $100.00 per week
> deducted from your paycheck with employer matching? am i missing
> something here on just what is considered savings because everybody
> and their brother has one of these accounts. please enlighten me.

Apr 02 01:03 PM

[henarl:]

While it is true that government's borrowing and spending is more than offsetting private saving, it is also true that the only thing an individual has any control over is his own saving or spending. We can only do what we believe is personally advantageous to us as individuals and, at the present time, saving or investing in real assets rather than spending on depreciable items and experiences seems to be the smarter choice.

Apr 02 03:13 PM

[grh1212:]

Yes, Friar Tuck, you are correct. Furthermore, the Social Security payroll deduction is a sort of backdoor savings. It is a result of a bargain that just as you, at least partially, support the elderly when you are in your working years, so will the oncoming generation contribute to your own living expenses when you are retired. And may the Ann Rand bobble heads explode.


On Apr 02 09:25 AM friar tuck wrote:

> are all the voluntary contributions to 401s, iras, 403s, etc. NOT
> considered saving?

Apr 02 06:57 PM