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Thursday, February 08, 2007

Savings Rate

At the personal level, savings is about deferring some consumption into the future. Say for retirement. Some individuals may not be saving enough for their own future benefit. On a national or aggregate level it's supposed to be about providing material for investment in future production. I'm not going to get into arguements about the validity of that statement now. What I have noticed over many years is that even with the reported savings rate dropping, there is still plenty of investment in this country from both domestic and foreign sources. You can waste time worrying if you wish, not me! So did you see the headlines last week?

"Savings rate at level similar to Depression"

"2006 Personal Savings Fall to 74-Yr. Low"


Or maybe not:

It seems the media and even some economists who should know better have no problem pushing the panic button over any data that suggest the economy is struggling — but studiously ignore anything that suggests we're actually thriving economically.

So it is with the savings rate. Each time it's announced, a round of tut-tutting is heard from pundits, economics wonks and policy-makers about how Americans are "spendthrifts" and "just don't save enough."

To which we answer: Nonsense. Indeed, the savings rate is one of the least useful pieces of data issued on our economy.

We've saved plenty, as shown on the accompanying charts. In the fourth quarter, we had amassed $1.8 trillion in gross savings — more than enough to fund the estimated $1.43 trillion in private nonresidential investment we made.

How could savings be so high when we're constantly told it's at Depression-era lows? Easy. The scare stories focus solely on personal savings, failing to take into account the savings of households, businesses and government. When those are added in, we have an enormous amount of money at our disposal.

Those who say a low savings rate is bad for individual households are correct. Problem is, there's no evidence Americans aren't saving much. Rather, the "savings rate" doesn't capture what they save.

But if savings doesn't matter, what does? In a word, wealth.

Net wealth — the total value of all assets, including stocks, bonds, bank accounts, houses and retirement funds, after subtracting debt — is about $54 trillion, up a hefty $16 trillion since President Bush cut taxes in mid-2003. If you divide that $54 trillion by America's 114 million or so households, you get an average net worth of roughly $474,000.

So you can see why Americans aren't putting away money at the end of the month from disposable income. They don't need to. Or they're already doing it but it isn't measured.

So stop worrying about the plunging personal savings rate. The game's not about accumulating savings; it's about building wealth — something we Americans are very, very good at.

Don't worry, be happy!

hat tip: Will Franklin


Oroborous said...

The problem with "wealth" is that a) it's often illiquid (businesses, farmland, homes), and b) its value can plunge virtually overnight (Black Friday, bust, Florida land mania).

So while having wealth is a Good Thing, and it can replace savings in some situations, we need to apply a discount to the total net wealth figure when estimating whether it's enough to see us through hard times, because it's all POTENTIAL savings, until we get cash in hand.

For instance, that $ 54.06 trillion is going to be about $ 47 trillion by the time the housing bubble unwinds. Where will the other trillions go ?
They'll evaporate back into the aether from whence they came. A pedestrian 2,000 sq. ft., three bed, two bath in SoCal was never "worth" $ 900,000.

Howard said...

No question that some wealth as represented by prices of stocks and houses can evaporate. Beyond some of the froth, these values reflect an improvement in our real ability to meet people's needs and wants. That's the thing to understand... In contrast when policy works against such ability, a country heads in the direction of Zimbabwe to pick an extreme example.

Hey Skipper said...

Or they're already doing it but it isn't measured.

Based upon how the savings rate is measured, I figure it accounts for about a third of my net worth.

How can that be?

The problem with "wealth" is that a) it's often illiquid (businesses, farmland, homes), and b) its value can plunge virtually overnight

Since I am in the midst of getting ready to take a bath selling my house in the Detroit area, I can sympathize.

However, since I am simultaneously the beneficiary of impressive investment growth, I can't figure out whether I'm supposed to lay awake tonight, or not.

Oroborous said...


No, no point in losing sleep over it. If you've put aside an emergency fund of monies that aren't at risk, then you've done everything prudent.

The rest is just life.

Bret said...

oroborous wrote: "The problem with "wealth" is that ... b) its value can plunge virtually overnight..."

But oroborous, the value of savings can drop virtually overnight as well. It's called hyperinflation. After it's "saved", there's no real distinction between wealth and savings.

Oroborous said...

It's true that savings can be eroded, but cash can usually be easily invested in non-cash assets. My point is that it's sometimes difficult to turn non-cash assets into cash, and thus, we should apply a discount to the "wealth" figure, when comparing it to "savings".

Sometimes "wealth" won't be there when you need it.

Hey Skipper said...


You are right. I will have converted a non-trivial amount of investment assets (which weren't cash, but could be converted into cash at a moment's notice) into nothing via home ownership.

Of course, for a great many people, probably the majority, that simply isn't a problem.

People who have no equity in their homes, and no savings, and want or need to relocate are in a world of hurt.