This appeared on CNN Money a couple of days ago about Americans saving too much:
Why saving is killing the economy
Saving more and cutting debt might sound like a good plan to deal with the recession. But if everyone does that, it’ll only make matters worse.
That’s probably the most misleading (almost irresponsible) statement/observation that I have come across during this unhappy recession.
I think I now understand why this country is going through a recession in the first place. Remind me, why are we currently being chased by this dark financial cloud - was it saving too much … or perhaps, was it spending too much (in fact spending too much of borrowed money)?
It is not like Americans were saving “enough” all these years and suddenly they have started to hoard every penny they have leading to an economic crisis. Consider the situation in 2005-2006 as reported by MSNBC:
Americans’ personal savings rate dipped into negative territory in 2005, something that hasn’t happened since the Great Depression. Consumers depleted their savings to finance the purchases of cars and other big-ticket items.
The Commerce Department reported Monday that the savings rate fell into negative territory at minus 0.5 percent, meaning that Americans not only spent all of their after-tax income last year but had to dip into previous savings or increase borrowing.
… “Americans seem to have the feeling that it is wimpish to save,” said David Wyss, chief economist at Standard & Poor’s in New York. “The idea is to put away money for old age and we are just not doing that.”
Now that should have been like a slap on head - those numbers were indicative of the fact that people were spending money that didn’t even belong to them (borrowing). Sure enough it propped up the economy in the short term (markets did great in 2006 ~ 2007, housing demand/prices did great, etc.), but it seems now (20-20 hindsight) that we were just heading higher up the cliff, inflating the bubble, and increasing our chances of a successful financial harakiri in the future.
It reminds me of those situations in cartoon films where the characters run off a cliff … walk in the air for a while … and then suddenly realize that the freaking ground is no longer beneath their feet.
The current saving rate is higher than in the past, but it’s not like it is way out of whack. In fact, I am not even sure that increased saving rate is going to be sufficient when extrapolated a few decades into the future. PBS reported this about a week ago:
Amid fears of further job cuts and economic uncertainties, Americans boosted their savings rate to 3.6 percent of their after-tax incomes in December. That was the highest level since tax rebate checks temporarily pushed the rate up to 4.8 percent in May, the Associated Press reported.
That’s saving $36 out of $1000 disposable after-tax income - nothing to write home about.
Anyways, increased savings rate, however small, suggests to me that Americans are now coming to their senses and doing what is necessary to ensure some level of financial security over the long run.
Whatever the numbers are, here is the truth. A good economy doesn’t need consumers who spend “freely” - it needs consumers who spend “wisely” - better still, a good economy requires consumers that save and invest wisely. If Americans don’t save for their retirement now, they are going to increase the financial burden on national reserves in future - if they save now, they would be in a better position to spend later.
What would hurt the economy is “hoarding”. However, there is a subtle difference between hoarding and saving. Hoarders don’t have a reason to hoard, but savers always have a reason to save - and more often than not, the reason is to be able to spend wisely in the future on things that matter.
For those who are interested in furthering their knowledge about savings rate and its effect on the economy, this paper (pdf file) on federalreserve.gov will give you some clues.