My father is a saver. He had a lucrative career as a corporate lawyer. But, he didn’t spend like it. Although I never wanted for anything, we were certainly not awash in things. My mom and dad have had the same washing machine for 20 years. It works fine, so there is no need to replace it or upgrade to the newest model. My parents conspicuously saved for their retirement. And now, they are fine. I often joke with my dad that he should get the crowbar out, open his wallet and spend some money on himself. The point is my dad is a saver. And I am damn proud of his actions.
My dad is also in the distinct minority of Americans. Collectively, we don’t save anymore. We spend everything we make. And it is a problem that is now an epidemic.
Why is savings important? There are two very important reasons. First, at the macro-economic level savings is the engine of future growth. Individuals deposit their savings into the financial intermediaries such as banks, stock brokers, life insurance etc…. The intermediaries in turn lend the money in larger amounts to businesses that in turn invest in assets to increase their profits. The more money available, the lower the interest rates charged for loans. A key concept to remember is savings flow-through the economy from households to financial intermediaries to business. Secondly, and more practically, savings is vital in case of an economic downturn. If a person loses his job and has enough savings to still pay his bills for an extended length of time, that person has the ability to manage his affairs more prudently.
At the national level, the US savings levels are pathetic.
The only organizations actually putting aside money are corporations. The amount of money they put aside was 174.9 billion in 2000, which increased to 397.3 billion in 2004.
The Republicans are in charge at the federal level. This means borrow and spend is in full force. The federal budget deficit has ballooned under the fiscally conservative party again.
At the household level, the numbers are poor. First, economists define “savings” as disposable income (personal income – taxes) minus consumption expenditures. A non-ecogeek way to say this is savings is what is left over after you pay your taxes, bills and general expenses. Essentially, we are trying to isolate money households don’t spend today that they can readily access tomorrow with no financial strings attached (such as interest) should they need it.
In 2000, savings was 2% of personal income and 1.7% of GDP. In 2004, the numbers were 1.5% of personal income and 1.26% of GDP. The latest personal income numbers indicate that number is nearing 0%. In words, at the macro level, people are spending more and more of their income every month and putting less and less away for future consumption.
Over the same period that people were not putting money away, they were increasing their debt levels. Total household borrowing was 5.5 trillion in 2000 and a little over 10 trillion in 2004. Explosive growth in mortgages is the primary reason. Total mortgage debt increased from 3.36 trillion in 2000 to 8.78 trillion in 2004. People aren’t saving from their paychecks. Instead, they are borrowing against future earnings and anticipated asset appreciation.
The above examples illustrate a fundamental US economic problem: we are too dependant on consumer spending for economic growth. We are slowing moving away from the concept of making things to the concept of consuming things. A primary argument used by this administration in trade talks is other countries have insufficient demand. What they fail to recognize is the US has too much demand and is too dependant on demand for economic growth.
More importantly, savings allows the US consumer to weather financial storms and enjoy retirement. The less we save as a country, the more vulnerable we are to economic downturns. A lack of savings is essentially a huge problem that is waiting to cause serious damage.