Americans Now Have a Negative Savings Rate

[Pangloss]

http://www.sun-sentinel.com/business/local/bal-te.bz.savings02feb02,0,7479458.story?coll=sfla-business-headlines

 

To summarize, the US Department of Commerce released a report the other day that showed that Americans now have a negative 1% savings rate!

 

Interestingly, as this article explains, economists are actually split over the bottom line impact of this. The general consensus seems to be that it's bad, but how bad it is is up for debate.

 

One of the interesting things they mention is that the poor aren't the only ones doing badly when it comes to putting money aside. Apparently wealthy people are also saving poorly. Of course if you have a lot of money then you don't need to put as much aside, but the real point is that the savings problem appears to inflict all Americans. It's more a matter of an overall societal problem rather than a problem of those with below-average income not being able to, say, fill up their gas tanks.

 

We always hear in this country about the "gap between the haves and the have-nots" (or as President Bush put it, "the haves and the have-mores"). It's supposed to be the highest it's ever been. Well I say great -- glad to hear it. Don't get me wrong, I think our prosperity should allow us to give a bigger helping hand to those who are actually in need. But I think we should also recognize that people who just can't afford the latest XBox360 are not in need!

 

Putting food in people's mouths, that I can help with. Making sure that every American can afford a BMW -- not interested.

[1veedo]

A lot of people dont seem to understand that the United States is a post-industrial economy. One defining characteristic of a post-industrial economy is a divide between the upper and lower class. That's just the way it is.

 

The funny thing is, we dont know what comes after post industry. You go through pre, industrial, and post... but what's next? If you look at an industrial society, it has a large middle class. Very few poor and rich people. Even the rich people aren't as rich, compared to the middle class, as those in a post-industrial society. During the transitional periods the divide starts to become more apparent. I'm not an economist but maybe the rich just keep getting richer and the poor/middle class just keep getting poorer -- everyone just becomes, essentially, slaves to the upper class. Or maybe the economy eventually collapses back into preindustry

[Gypsy Cake]

All this sounds very interesting.

For my clarification, Pangloss, does -1% savings rate mean that people are taking more credit from banks etc.

[D H]

A lot of people dont seem to understand that the United States is a post-industrial economy. One defining characteristic of a post-industrial economy is a divide between the upper and lower class. That's just the way it is.

 

Who defines a "post-industrial economy" this way? Certainly not Europeans. There has been a divide between upper and lower classes throughout history. I don't think the huge divide that currently exists in the US is unavoidable or is indicative of a "post-industrial economy".

[Pangloss]

All this sounds very interesting.

For my clarification, Pangloss, does -1% savings rate mean that people are taking more credit from banks etc.

 

 

Actually, after I did further reading on the subject, I came to doubt my original premise of the thread, and I now view this as in error. Don't get me wrong, I still believe that it's both important and unfortunate that we're not saving more money and that we're going deeper into debt. This is a long-term problem that deserves the long-term focus of educational efforts as well as institutional changes and better social understanding. We've got to put a stop to the "keeping up with the Joneses" mentality.

 

But the negative savings rate itself is probably just an artifact of our current lack of scope in assessing these things. It doesn't encompass enough variables.

[Gypsy Cake]

I tried to find the UK savings rate so we could make a comparison; I think it was 3.7% at the end of 2006. I also think it's seen as fairly stable.

 

In my opinion, we have a very good chancellor; Gordon Brown. That I think has managed our country's economy over the last 10 years very well. How does the US equivalent fair? Or would say it was out of their control? and more the culture ,as I realise you've already mentioned.

[Pangloss]

I'm not even sure if they measure the same things.

 

Maybe someone can step in here and elucidate for us how these things are measured and tallied.

[Gypsy Cake]

how do you mean "they do not measure the same things"... Are you referring to the savings rates? Because I took the statistic of the UK's %of net household income saved. This is what I thought you were commenting on.

[Pangloss]

Well again I'm not an expert here, but it's my understanding that the problem lies in two areas.

 

First, the report doesn't show that the average American is spending more than he or she earns. It shows that the cumulative body of Americans is spending more than it earns. That means that by definition this number *must* be less than 100% accurate, because it doesn't include all manner of income that isn't reported as "earnings". (See next point below.)

 

Second, not all incomes are reported as earnings (hehe, did you see that one coming? <grin>). Let's say you own a stock, and it rises in value, and you sell it. That's not income, it's "wealth", and it isn't counted as income. If you spend that money, however, it is very much counted as spending. And remember -- the number is cumulative, for the whole country.

 

Even more revealing, this includes the housing market, which (although this is certainly not the case anymore) exploded over the last decade, causing a vast increase in personal wealth, at the very same time that there was very little change in income. Of course most people don't spend that money if they can help it, but some do, and we've all heard the stories about "real estate churning" -- that goes into the mix as well, on the negative side of the balance sheet.

 

But again, none of the experts I've read say that we're doing WELL in this area. I don't know how they know that, but they're experts and they seem to agree that the numbers don't add up in a positive way -- the consensus is that personal savings is a serious problem in this country.

 

But it appears that the way in which we (or at least the US Dept of Commerce) measure "savings rate" is somewhat flawed or misleading, at least to a small degree. It's not fully indicative of what's actually happening.

[Dak]

gypsycake:if savings rate is what it sounds like, then i sincerely doubt that the UK has a positive savings rate. a couple of years ago, our national debt (as in, the combined debt of all our citisens, not the money britain owes other countries) exceeded £1trillion. which, for you non-brits, yes, is a staggering amount.

 

its possible that things have changed since then, but i'd doubt the 3.7% figure...

[Gypsy Cake]

Yeah I remember lots of news on our debt but I looked for the savings rate and that's what I found.

I got the stat from [url=]http://www.statistics.gov.uk/instantfigures.asp[/url] (the houshold saving ratio). I may have misunderstood, perhaps have a look if you doubt it.

 

The only idea I have to possibly account for the debt is that maybe its a younger age group that is in debt but older generations are still saving. I don't know.

[Dak]

hmm, fair enough.

 

iirc, the govournment stepped in and bitch-slapped the banks, capping interest rates and whatnot. maybe it worked?

[D H]

The kitchen and bathrooms in our house needs improvement. 25 year old wallpaper, etc. If I took out a home improvement loan I would be impacting the negative savings rate.

 

I have three kids in college (ouch!). This is not cheap. We are now spending the money we intentionally built up over the years to put our kids through college. Negative saving rate!

 

I still manage to put money into a 401K, with matching funds. How much of this counts as positive savings? (From what I can tell, it doesn't. Then again, I am just a dumb engineer, not an economist.)

 

I am not alone in this regard, as I am at the peak of the baby boom. Many others like me have aging houses in need of repair and kids in college in need of tuition. The baby boom (peak 1955, first child at 25+) has a lot of kids in college, own aging houses, and still puts some away for retirement. I have to wonder, how much of this purported negative savings rate is real?

[Pangloss]

Well, that's another aspect of it, I agree, but that is real debt, so measurements that include those debts would seem to be relevent (real), at least to me. There's something to be said for what that kind of debt says about how comfortable people are with their situation, but in the end it still has to be paid back, and some percentage of it will not be.

[john5746]

Well, that's another aspect of it, I agree, but that is real debt, so measurements that include those debts would seem to be relevent (real), at least to me. There's something to be said for what that kind of debt says about how comfortable people are with their situation, but in the end it still has to be paid back, and some percentage of it will not be.

 

Yeah, I think we are sending our money abroad and they are paying for our mortgage. We get nice, cheap trinkets for awhile, but once they take their portion of the equity - it hits the fan.

[Pangloss]

Well perhaps. The real issue is that that's one possibility, and it's a possibility that can be avoided either (a) easily -- be solving the problem now, or (b) expensively -- by solving the problem later.

[Skye]

It's a bit of a non-issue since it doesn't take into account that investments being are being spent to fund retirement. With an ageing population you would expect the savings rate to fall, as more people are living off their investments.