Temporary Savings Rate Uptick or Long Term Shift?

We wanted to post up this chart courtesy of Paul Kedrosky which illustrates a 'black swan of U.S. savings.' As you can see at the bottom, the savings rate in America has been paltry. At best, it has steadily declined over the last 20 years.

However, the massive recession we've seen has made people hunker down and we're seeing a return to shoring up personal balance sheets. Americans have tightened their spending so much that we've now seen the "largest three-year increase in savings in modern U.S. history" with the rate recently hitting 6.9%. This is obviously a good sign and hopefully can point to Americans changing their ways in the future.

In a timely piece (we're biased of course), we just last week examined the highest yielding savings accounts out there at the moment. After all, numerous readers had been asking what to do with their large, idle cash positions. We considered all the emails and comments to be our own little subset of the current American mindset; a random sampling if you will.

While there are signs of improvement in consumer/saver behavior, there is still a distinction between a temporary adjustment and a permanent shift. You'll recall that Americans are programmed to spend, spend, spend. We are a consumer nation and we consume; it's what we do. So, we'll have to see an overall change in psyche for this positive recent trend to continue. Otherwise, it will become just another upward blip in the context of an overall downward trend.

Because remember, we have a serious problem when it comes to consumer balance sheets. Millions of consumers have massive amounts of debt and we've touched on the topic of downgrading the American consumer's credit rating in the past. It will be a long and arduous process to repair the damage. But, raising cash levels certainly helps. The problem is getting consumers to keep their savings rate high now that it is improving.

We postulated back in December of 2008 that the consumer savings rate would have to rise. It has. But, now what? We would now venture a guess that the vast majority of people are raising cash levels merely to stave off any uncertainty in the mean time. Then, once the 'good times' return again, they'll revert to their programmed ways. This is a reactionary move, rather than a proactive one. It is temporary. To truly get out of this mess and to solve one of the many enigmas of the crisis, consumers need to shore up balance sheets for good, not just 'for now.' How many Americans will truly change their ways? Unfortunately, that question will only be answered with time.

Click to enlarge:

Comments

[Jonas Zamora:]

For too many Americans, it about consumption and keeping up with the Joneses. We must get out of this mentality. You look at many with nice cars, big houses and believe they are doing well. In reality, they are awash in debt and slaves to their bankers. I hope the uptick in savings rates is not just reactionary. How can we do better?

1) If you can't afford it, don't buy it.
2) Cut up all our credit cards if we must.
3) Buy used cars with cash and work your way up to a nicer car in the future. Always pay cash.
4) Do not use debt as a tool. This is an overplayed theme especially those that sell systems and books on how to buy real estate.
5) Do not stretch yourself just to buy a house. Your payments should be less than 25% of your income.
6)Have an emergency fund separate from savings equal to 6-12 months worth of expenses.
7) Save, save, save!
8) Be generous
9) Pay off your debts starting with the smallest and working your way up to your highest balance. Use the Debt Snowball Method.

Jun 30 04:45 PM

[Henry Buttal:]

A couple of comments on the timeline of the chart, and savings.

I think part of the above effect is in fact what the government calls "savings", and also reduction of consumerism. But also, part of what you see is a reduction of the willingness to take on risk, as in a risk premium of specific investment. Most people don't have a clear idea of risk until it is painful, like say a 50% loss in stock market assets. So some of the "savings" is likely to be a move from assets not counted as "savings" to savings.

To prove my point, look at the times in the chart the savings rate was at or near its peak in the 70s and 80s. On at least two of those occassions, stock markets returns were extremely poor, and interest rates were very high. Thus, "savings" made tremendous sense, and in some cases offerred inflation plus returns.

Jun 30 05:15 PM

[Market Folly:]

Henry Buttal, great comment and insight. While we'd agree with you that this reflects a portion of the overall picture, we're not sure it reflects as big of a chunk as you might think.... Just a piece of the overall pie of factors influencing the rise in cash levels.

Jun 30 09:18 PM

[Ted Hurlbut:]

I doubt we're about to return to the kind of savings rates we saw in the 70's, but I also don't think we're likely to go on a credit binge like we've seen in the last decade for a long time to come. My sense is that we'll settle in somewhere in the middle, which is much more sustainable.

Ted Hurlbut
www.hurlbutassociates.com

Jul 01 12:05 PM

[Old Trader:]

Regarding whether the increase in savings is a short term reaction to the current crisis, or whether its a more profound, longer lasting shift in behavior, I think that depends on long the current malaise drags on.

Like paper training a puppy, it takes more than 1 "lesson" for the training to take hold. If the economy were to make a V-shaped recovery (and the odds of that rank between slim and none, and slim just left town), I'd guess consumers would return to their bad old ways relatively quickly. Given the recovery will be weak and prolonged makes it more likely the increase in savings will continue, albeit at a more modest pace, perhaps.

Jul 02 12:50 AM