Watch out, world: Americans are saving again

Discussion in 'Economics' started by makloda, Jan 17, 2009.

  1. Interesting hypothesis: Will an increase in the US savings rate incuce a depression in China and destroy the EUR?

    In one of the biggest and most misunderstood changes in modern economic history, citizens of the largest economy in the world are suddenly doing something they haven't done in years: They're saving money. It is having myriad consequences, including a tsunami of money in one part of the world, and an air pocket in demand in other parts of the world, especially China.

    Americans are suddenly spending less than they earn. While that might not sound heretical or surprising - how long can you go on spending more money than you earn? - it is an epochal moment for the free-spending United States. After saving an average of more than 7 per cent of disposable income until almost 1990, the United States went into a savings tailspin. Savings rates fell, in fits and starts, from 8 per cent, through 6 per cent in the early 1990s, to 2 per cent around 2000, to the ignominy of a negative savings rate by mid-2005.

    Now, however, that is changing rapidly. November economic data showed U.S. savings spiked to 2.8 per cent of disposable income, up from zero at the beginning of 2008. Is it that Americans have suddenly figured out that saving is a good thing, or are they taking some sort of moral stand against profligate spending?

    Be serious. Americans remain the wild-eyed spenders of the world, and that was never likely to change without external pressure. They have, however, been forced into this, with their equity investments and real estate investments all sliding into nothingness, and with the economy in a deep recession. They must repair their broken personal balance sheets, and so, as painful as it might be, they are saving money.

    Great. Good for Americans, right? Savings über alles! Well yes, but there is much more to it than that. For starters, the U.S. savings rate won't stop at 2.8 per cent. My guess is it will rapidly rise to 4 per cent by the end of the year, and will likely hit 7 per cent by late 2010.

    But in the end, fixating on those numbers misses everything that matters because that money has to come from somewhere. Your savings, in some sense, represent my lost income. Increased consumer savings is like extending a dam further into a river of money - call it personal income - and diverting some of the flow into a different river. Instead of going into the river called "consumer spending," more of it is going into the river called "savings."

    To put it in context, a U.S. savings rate of minus 1 per cent meant roughly $2-million a minute was flowing out of U.S. consumer savings into other things, mostly consumption, like TVs and home renovations, and so on. Or, on an annual basis, that worked out to almost $1.3-trillion exiting the U.S. banking system for other places.

    Turn that around, however, and things get very different, very quickly. At a 3-per-cent savings rate, the United States will see $3.8-trillion showing up next year in the banking system just from domestic savers. At 7 per cent, almost $9-trillion will come rushing in as part of the savings tsunami. It is a fire hose of money pointed at the banks, and it's just beginning.

    These are ear-popping figures. Three per cent, for example, produces almost five times as much in one-year U.S. capital inflows as the entirety of China's current Treasury holdings. It is four times as much as the proposed Obama stimulus plan. In short, at even relatively small changes, at least in percentage terms, the United States will rapidly transform its banking system and its capital markets.

    All that money has to come from somewhere, however, and among the main sources will be the United States' largest trading partners, chief among them China. The U.S. economy is more than three times the size of China, and if you match the U.S. trade deficit against the Chinese trade surplus you'll see that China accounts for, on average, about 60 per cent of the U.S. deficit. As a result, China is going to need to find a way to replace more than 10 per cent of its gross domestic product if the U.S. savings rate returns to its historical norm. Making matters worse is that Chinese consumers are a smaller percentage of GDP than their U.S. counterparts, so to make the math work, Chinese consumers would have to up their buying by something like 25 per cent. Will it happen? No way.

    To be fair, China is not the only country faced with the problem. Similar situations exist in most countries with which the United States has deficits (edit: much of western Europe exporting their wine, designer clothes, cars and luxury watches), all of whom are going to see massive export declines as U.S. consumers turn spending into savings. It will be the biggest story of 2009: How will the rest of the world restructure in the face of a United States hell-bent on replenishing its bank accounts? In the short run, it can't, which is, in part, why we're seeing the global trade tailspin that we are.
  2. I wonder if , to defer maintenance or postpone the inevitable is really saving?

    Unemployement is up = savings go up?

    Maybe Americans are really saving at this point to pay for the tax increases looming on the horizon.

    The Fed's can annnounce any tax relief they wish, the shift in tax collections is through fee's and use taxes.
  3. Daal


    I think he is confusing the banking consequences of this. a rise in consumer spending(fall in consumer saving) is offset by a rise in corporate income and probably saving as well, as most of the money is spent domestically, so the money found its way to the banking system through corporate accounts
  4. 1% of a 13 trillion GDP is 130 billion a year not 1.3 trillion. This has been debunked in the comment section of the article.
  5. savings is probably not going up, rather spending is going down.... some manipulation of the data might make it look like Americans are saving.... I'm saying the entire economy is retracting... so the way of measuring it would change, and if they showed it were retracting - they'd realize people aren't saving more.
  6. clacy


    His numbers might be way off, but the point remains, that there has been a paradigm shift in the US and the entire Western world.

    People are for the first time in a long while, scared as hell about their jobs, the economy and their future. That results in more savings which equals less spending.

    US companies will feel this pinch, especially in the non-essential sectors like retail, autos and restaurants. Counrtries with economies tied to the US consumer, will be hit the hardest and China being the worst.

    Even though Barack would likely love to increase taxes, I believe that he won't be able to pass radical tax hikes due to a poor economy and the fact that he and the rest of the Dems will be voted out in 2010/2012 if that happens. In his second term, that is a much greater possibility.

    I also believe that Americans are going to reach their breaking point with deficit spending and the SS/Medicare debacle. I think after the American public cleans up their balance sheets, they will set their targets on the greedy, irresponsible politicians that spend/borrow/tax us to death.
  7. Right on nutmeg. Research has shown that when people expect tax increases they save the amount of the tax increase that is expected and consumer spending declines so which is better? Consumer spending or Government spending? You don't typically get increases in both at the same time. Spending just gets shifted from one source to another.

  8. I read each % of savings increase will mean a% drop in GDP.
  9. S2007S


    With savings going up and less consumers spending you can say goodbye to 1% of our GDP for quite sometime. Anyone wishing and hoping for GDP to be in the 3-4% range anytime soon just better give up because you will not see that growth rate for at least 5-10 years as the US goes through something called a severe recession lasting 10-20X longer than your average recession.
  10. pt199


    CLACY-good post and amen to that!I hope we start holding politicians accountable but it doesnt look good!
    #10     Jan 17, 2009