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America’s Saving Surprise

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All of this changed abruptly when the American economy fell into a deep recession at the end of 2007. The stock market dropped sharply. Home prices fell 40%, completely wiping out the equity of one-third of all homeowners with mortgages. Household wealth is now $10 trillion dollars less than it was before the recession began.

That fall in wealth means that households must save more to prepare for retirement, and that retirees are not able to dissave as much as they did before. Banks and credit-card companies have become much more cautious about extending credit. And, with unemployment stubbornly high, many households are saving in order to have additional cash if they should lose their job or be put on shorter hours.

Rebuild Wealth

There is no way to predict what the saving rate will do next. Households’ need to rebuild wealth, and the lack of access to credit, implies that the saving rate could continue to rise from the 6.4% recorded in June (the most recent month for which data are available) to the 9% rate that America averaged in the decades before 1985. If that were to happen quickly, total spending could decline, pushing the economy into a double-dip recession. But if households instead become optimistic about the pace of recovery, they might choose to cut back on their saving in order to maintain consumption, despite weak earnings. Only time will tell.

Household saving is only one part of net national saving. Since after-tax personal income accounts for about 75% of GDP, a household saving rate of 6% translates into just 4.5% of GDP. Corporate retained earnings have averaged about 3% of GDP after allowing for depreciation of existing plant and equipment. The combination of household and corporate saving brings total private saving to 7.5% of GDP. Unfortunately, government borrowing to finance its deficit over the rest of this decade is projected to absorb about 5% of GDP. That would leave a net national saving rate of just 2.5% of GDP.

Such a low national saving rate would not be sufficient to finance the level of new investment in plant, equipment, and housing that the country needs. So, despite the rise in the household saving rate, unless federal government policies change to shrink America’s future budget deficits, the US will continue to be dependent on capital inflows from the rest of the world. If that happens, global imbalances will continue to add risk to the global economy.

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