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In yesterday’s WSJ Bob McTeer, fmr. President of the Dallas Fed, wrote an insightful opinion on “our dismal savings rate”. Here’s a little taste:

Economists say the main reason they worry about the budget deficit or the current account deficit is their impact on domestic saving. But my guess is that only other economists really get their meaning. Most people may be even further misled by the implication they hear that since the main harm of deficits is their impact on saving, they must not be too harmful after all. The old-fashioned notion that deficits are bad because they create debt that must be paid back with interest is probably a better prod to constructive behavior. Or that deficits impose a burden on our children or grandchildren.

Absolutely correct. In terms of how it affects the economy, I think that politicians and voters have tolerated budget deficits for so long because few are sure of how they hurt the economy. 

In reality they have a real effect on how much our economy is able to produce. There is of course only a limited amout produced in any given economy over any period of time. Some of that is spent for present enjoyment and the rest is saved. Savings is accumulated for the sake of fueling production in the future, so if their is less saved then the economy will be less able to produce in the future.

When the government spends in the red it has to borrow money to finnance the habit. That borrowed money comes out of the national savings (total money saved in the economy) and will no longer be available to finnance future production.

But not only is our government not saving but individuals themselves are not saving either:

http://www.bea.gov/briefrm/saving.htm

(The personal savings rate has been negative for each of the last 8 quarters.)

My initial impulse is to consider what might be the causes and effects of such a low personal saving rate.

My first thoughts on the root of the problem have to be the extremely strong consumer culture in America which is doubtlessly more profound than that of other economies. However that culture is nothing new and does not explain the notable downturn in personal savings in the past couple of years.

Another idea is that a loose fiscal policy (taxation wise, i.e. the Bush tax cuts), but that hypothesis does not stand. Certainly tax cuts would spur more spending but they would not cause personal deficits. If anything greater disposable incomes would result in people saving a greater percentage of their income.

The best explanation is that a loose monetary policy has encouraged a massive amount of borrowing and spending rather than savings. One has to question why the Fed would keep interest rates so low since savings rates are so low. Surely its what keeps consumers happy, and investors happy, but its also a distortion of the market.

Three or five or seven years from now people are going to start waking up and realize that there is not enough capital in our economy’s reserves to maintain the level of production that we expected. And then there will be a recession.

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The America’s non-existant savings by New School Politics, unless otherwise expressly stated, is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 United States License.