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.
{ 1 trackback }
{ 28 comments… read them below or add one }
It is important to realize that significant negative effects to the economy are a short-term effect of saving, not an infinite loop. It is safe to say that the increase in savings reduces total economic demand. If the business you work for was on the brink a year or two ago, that $36 that might have gone to you from 100 different customers might represent the difference between staying open, and closing for good.
If they close, now the business’ employees don’t have any income at all. Which means they now won’t spend anything (which is a much bigger hit than the $36 cited above). With other businesses going through the same problems, some individuals will be forced into bankruptcy. Which then poses more ongoing problems for creditors.
I think everyone in the U.S. agrees that the savings rate should go up. The question is to what extent the nation as a whole should allow that positive effect to also become a Pyrrhic one.
It seems to be the same here in Australia. Everyone I’ve talked to is using the extra money from the stimulus package ( one before Xmas & one coming soon) to pay down debt instead of spending.
It’s difficult because although spending is good for the economy and helps us collectively, people are afraid of job losses and trying to put themselves in the best financial position they can in these uncertain times.
I have read things like this as well and disagree with them. People need to worry about their own situations and can’t just spend for the hell of spending because of some theory that the economy will suddenly turn around. Consumer spending is still relatively high despite the times, people need to worry about themselves.
I don’t think people should spend just to help the economy. You have to worry about yourself. And honestly, if people are finally starting to save a little money again (we recently had the first negative savings rate in the US) then that is great for everyone involved. The US is going to have to go back to some of its old ways of doing things. Businesses are going to have to adjust. People have to stop spending so much money. Businesses don’t need to grow as rapidly as they think they need to. We don’t need a drug store on every corner and a dry cleaners in every strip mall. We also don’t need a big box retail stores all over the place either. It will be painful, but the US and the individuals have to make some changes and it is finally happening.
Personally, I think each of us has the responsibility to get the most for our money. It may not immediately “help” the economy but rampant consumerism is one of the things that got us all into this mess in the first place.
For example , my daughter HAS to have a phone, No negotiation there, and I got tired of fighting with her over the high bills.
But I discovered that you can get out of your expensive cellphone contract if the company changes its terms.
When Sprint changed its charges for texting, I called them and was able to cancel the contract!
They won’t tell you, of course. You have to ask!
I turned around and got a pay in advance phone from Net10 and only pay what I can afford up-front and it’s now a part of my daughter’s “allowance” which has turned out to be a very good way to get her into the habit of budgeting.
It may not be a “necessity” to everyone but any way to reduce costs is good to me!
We are not talking only for spending, that includes deposit savings, loans, money exchanged in gold for example, money invest in a house or something and etc.
The credit party is over? The credit party should have been over a long time ago. You can’t live the way Americans were living and expect to sustain it. It’s irresponsible and now we’re paying for it. It was a house of cards which would eventually lead to disaster and we’re here now. There’s no insurance that things will bounce back quickly but I don’t think telling Americans to spend money they don’t have right now is the smart thing to say.
Jerry
http://www.leads4insurance.com
Unfortunately, Americans have been really poor about saving money. If we took saving and investing seriously, many of the so-called “structural” economic issues might go away or at least be alleviated.
Having money in the bank engenders confidence and security. Shopping as a form of “recreation” is insanity. And paying more for something “just because” or out of laziness or carelessness is similarly stupid.
I’m not saying that we shouldn’t spend money when necessary but I like to get my money’s worth. I’ll pay a little extra for something of higher quality because the price in the long-run will be less.
I don’t see any reason to pay extra for something when there’s no reason.
And speaking of prepaid cellphones (as mentioned above), I read this article and it showed how they really save, so why not?
You know I actually agree with you completely here.
We are so used to spending so much money that now when we look around and we see people saving its like wow what the hell just happened.
And 36 dollars for every 1000 is a joke actually, I mean before this recession people were in the negatives, so savings didn’t even exist for them.
But like I said, we are so used to living way above our means that it is like a shock for everyone now.
Worse, politicians and the media think getting out of the problem means to keep spending. I mean we got into it by spending too much, and now we are being sold on stimulus packages and told we should stop saving and keep spending.
Just plain stupid, I say let businesses fail, let it all flush through and start fresh.
I feel that yes in some way they are killing it.
ugh I have heard this awful statement so often recently and I just want to throw something at the tv!
I don’t think it would help matters AT ALL for people who were already buying everything on credit to continue doing so. These people really do need to start saving.
There’s a small percentage of people in this country who are debt-free and have cash reserves and I do think it would help if these people would cut back on their usual frugality and open their wallets at this time.
Something is wrong in America. We spent our way into this mess. Is there an expectation from people to continue spending now to prop the economy and magically expect to start saving when economy is ready to to turn around? People are going to start saving now if a rainy day strikes them. I can see the point: If saving deceases consumption and slows the economy. But there is no way out of this. Question is what is done by banks with people’s savings? Will they employ it in productive ventures or giving big bonuses. Frankly, there is no way around this.
Saving money is a good thing, despite what happens to the economy in the short term. Japan was a nation of savers when they had their lost decade, and they’ve never truly recovered. The US is a totally different story. I was hoping to hear experts encouraging saving despite what happens to our economy short term, but instead all I hear is that we have a dramatically increased savings rate. All this does is provide a false sense of security.
In the short-term, the additional savings are hurting as we are a consumption based society. However, in the long-run we should all be much better off.
It’s hard for people to have the confidence in a market when the market has failed them. Saving is a natural reaction to the financial situation that we are in however it simply adds more fuel to the downward spiral.
The saving rate tends to bottom when consumer confidence begins to show signs of being restored in most cases as a direct result of the employment rate hitting it’s peak.
Ya i agree that saving is very much essential, as we are not taking saving so much serious that’s why we feel that they are saving so much.
the only part of leadership that the bush administration got was the part where they funneled large sums of OUR money to corporations who then moved jobs overseas and continue to rob us today.
Looks like all those people saved to dump it on cash for clunkers. Ugh!
“A good economy doesn’t need consumers who spend “freely” - it needs consumers who spend “wisely” ” - so true.
We can’t just spend our way out of debt. That’s why throwing money at a problem never works. I love hearing people say that stimulus packages would work if it weren’t for the people who don’t spend them. Of course people are going to save money right now! It’s the only good thing that has come out of this recession; people are finally starting to take their finances seriously.
There is definitely nothing wrong with savings, if everyone in this country manages their money more wisely, it would be alot simpler to predict trends as economists.
I learned alot about this in my recent economics course, and it is true there is nothing wrong with savings, and Everyone should try to be more greedy.
Till then,
Jean
I still can’t help but cringe at the reality that savings hurts our economy. I understand it intellectually, but I can’t help feel that it is contrary to how things should be. I suppose infinite growth is in theory a good thing, but not when it is all just going into debt.
I think the rain in DC is getting to my mood!
Miel
On the one hand saving money is bad for the economy, but isn´t saving money the first step for a bigger investment like buying a car, house etc?
And aren´t big investments good for the economy?
Well my conclusion is here that the “bad” effect of saving money is only short-term but the long-term effect is good!
Nice Post!
I thinks that yes they are. Its not too good for any economy.
i dont think that why savign money we are savign the tax of the company. in my point of view, to save money is the preparation for the rainy time which may come in future. to save money is the work of decent people who knows their fiscal condition.
Youre spot on about spending too much. Look at all the people who have lost there homes because they were unable to pay the mortgage…imagine if they had saved a little…maybe we wouldnt be where we are now…
Don’t think so by much saving they killing the economy but they only preparing for their bad time so we can not blame to our every individual american.
Saving with the mindset of doing so for future opportunities to spend wisely, instead of saving for rainy days is an ideal savings plan in my opinion.
I myself wish my family would have held this mindset in the past. Thankfully we’ve changed our outlook and have a better financial plan in place.
Is global marketing really helping the U.S. or they are just throwing money out of there own economy?
Leave a Comment