Sep 1 2005

Less than Zero

I wrote a post a month ago about the US personal savings rate falling to zero in June – its 2nd lowest level since the great Depression.  It’s worth reading the comments to that post, which pointed out the following: 1) people are stupid; 2) don’t get too hot and bothered about just one data point; 3) the savings rate was actually slightly positive – at 0.02% – not actually zero; 4) there’s hidden savings in the US in the form of R&D, education spending and gains in home equity values that, while not exactly putting money into a bank account, is the equivalent of ‘investing for the future’; and 5) higher savings rates don’t necessarily translate into economies growing more quickly (using Europe as an example, although Japan would be another prime data point for this argument). All very good points and well taken (particularly the point on ‘hidden savings’ – I hadn’t thought about that before). However while low savings rates clearly have short term benefits to the economy (in the form of more money going into the economy itself – on a macro level this is a key driver in Keynesian economics) they are probably not sustainable in the long term (certainly not at or near zero).  Also, given the current administrations insistence on expensive outlays of capital and preference for tax cuts which are causing us to run quite a deficit, combined with our large current account imbalance, we’re reliant on someone’s savings to fund our economy (and if American’s aren’t saving, then we’re 100% reliant on other nations to fund our debt). Perhaps some economist readers might jump in here with their thoughts.

With all this as backdrop, it’s worth noting that today the July figures were released that showed that the July savings rate actually fell to below zero (to -0.06%) – its lowest level since monthly records began being kept in 1959 (see the full report here; note that quarterly savings rates during the depression were negative – monthly data were not kept at that time). Inflation is blamed for much of this shortfall (although that can only be the case when spending levels and income are already closely matched), but it’s a worrying trend.  Of course, in his comment to my last post on this subject Jack warns to wait for 3 months of data before getting too agitated, so perhaps we should wait and see if this trend reverses itself. . .