Americans' savings rate up to almost 7% - who benefits?

According to the Bureau of Economic Analysis, the personal savings rate in May 2009 was 6.9%.    This a 15 year high and a far cry from the negative savings rates of just a few years ago.   Although a part of the increase in savings comes from the large stimulus bills passed recently, most of the increase seems to come from changes in Americans' spending habits.  So who benefits from a higher personal savings rate?

First of all,  it seems that banks should be happy with this development.  Since the stock market took a nose dive most people are putting their savings in cash deposits.  According to the LA Times savings deposits at U.S. banks have surged by $4.48 trillion since last September.  Additionally, banks are paying very meager rates on savings deposits now, so this means that they are raking in oodles of profits when they lend the money out.

Next, businesses that help people save money  are also winning big as Americans shift to being more thrifty.  For example, stores like Walmart, Ross, and Dollar Tree are doing well because they align with consumers' goals of paying less.    Vegetable and fruit seed companies also reported rises in sales due to consumers' desire to save money through growing their own food.   Basically the concensus is that frugality is now "in".

Many economists say that the increase in savings rate is actually bad for the current recession because it means that Americans are spending less as a whole.  Since America's GDP is mostly based on personal consumption it makes sense that more saving takes a bite out of the GDP.  However, it seems to me that Americans are just starting to behave rationally and that cannot be a bad thing.  Historically Americans' savings rate has been above 7% until the early 1990's and it seems that things are just beginning to return to normal now.  I think the higher savings rate shows that Americans as a whole are starting to realize that living on credit is not sustainable, and eventually this shift in mentality will benefit the country as a whole.

Who do you think benefits the most from the higher savings rate in America?

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Guest's picture
The Economist

Great post Xin. I think you're absolutely right, people are finally coming to their senses.

But it's more than just that. The way capitalism is supposed to work in world where the government doesn't do bailouts, is that when banks don't have money, they increase interest rates, which encourages people to save. Then, the banks have tons of money, which they then can lend out. That is how money supply is naturally managed, and would be handled under normal market conditions.

Unfortunately we have the Federal Reserve which makes those decision based upon their whim. What's amazing to see is that people are increasing their savings with interest rates at ZERO percent. That means that people are putting money into savings purely because they don't want to spend it, without ANY monetary incentive (i.e. interest) to do so. Imagine if the Fed wasn't handing out free money to the banks and interest rates went up?! Imagine how many people would throw their money into a bank if they knew it would grow at 6% just sitting there?!

And that's why the government is worried, because sooner or later the Fed is going to have to raise rates. If they don't, they'll create inflation and the value of the dollar will plummet. And once that happens, people are going to love saving, not only for the security it brings, but also the interest. And when that happens the good old GDP, which you pointed out Xin, is mostly based on consumer spending, will drop like a rock. The reality is, our economy isn't as real or as glorious as we've been lead to believe. We have a great credit rating, but we're really broke. And sooner or later our creditor is going to do a credit check on us. God knows what they'll find.

Guest's picture
Diane B

Don't forget that the savings rate includes debt repayment - the average person is still in a mountain of debt and is just starting to dig themselves out. They still have no savings to speak of, including no emergency fund.

And part of the reason some poeple are no longer racking up debt is because they CAN'T, due to the inability to get credit, being maxed out, etc

If this continues for a whole year, then I'll be optimistic

Guest's picture

Banks, investment companies, and discount stores win big.

But isn't that the way it always is? Isn't that how the arbitrary save 15% of your income was propagated so quickly and effectively? I guess the banks and investment companies couldn't sell the saving 40% they would rather have, so the 15% comes in. Reachable, but a lot more than some people need to save and a lot less than others need to. Oh well. At least people are saving.

Guest's picture

This article is good - on the subject. I agree with those here who think savings is a good think... we don't need mindless spending to "fix" the economy.

Lack of consumption does have the possibility of fueling a debt-deflationary spiral. But savings are largely still churning through the economy, simply as investment or production rather than consumption. Yay!

Guest's picture

Even though it seems like savings arbitrarily dropped off, you need to look at equity extraction rates. In the 90’s, where you see the savings rate drop off, people started extracting equity from their real estate and stock market holdings. Watching these values increase substantially inflated their sense of savings because it was almost looked at as a quick way to get cash (Helllloooo HELOC funds!). You will probably see the savings rate normalize back at around 8% as people get re-acquainted with their actual savings.

Guest's picture

I think this is a tough call, banks obviously want to make money to recoup some of what they lost, but again they are thinking of themselves and only how that benefits them. They really need to look at the bigger picture and how this affects the whole country - if people stop spending the wealth won't spread and this could be worse for the economy. I think that this benefits people with money but what happens to the people working hard to make money from home and in their jobs - the normal person.

Guest's picture

The way I look at it, it's not my job to prop up the economy of man. EVERYBODY has a responsibility to themselves and their families to have a little safety net set aside to tide them over for the bad things that inevitably happen in life. Death of a spouse, job loss, divorce, disability, economic downturn, natural disaster, these things happen and a wise person sets aside enough money to tide them over. From the time of Joseph advising Pharoah to set aside 7 years grain in times of plenty to tide Egypt over for 7 potential years of famine, mankind has had enough common sense to save. Until recently, that is... Somewhere in the past two decades, we all got cocky and forgot that God and Nature deal an unforgiving hand to those who don't heed the dreams of Joseph and set a little "grain" aside.

True capitalism is about the collective actions of free citizens acting in their own self-interest benefiting society as a whole. Setting a little aside "just in case" is self-interest, while squandering every penny you have and then going even further to spend money you DON'T have is lunacy.

Climate change, peak oil, and a nuclear armed North Korea and Iran are coming at us and, if you think a few big banks melting down was ugly, wait until you see oil at $7 per gallon. Americans need to focus on rebuilding their "7 years of grain" before we start worrying about pleas from greedy CEO's of multinational corporations to squander our own self-interest to prop up their greedy lifestyles. After you've got your head above water, if you want to prop up your local economy, hire an independent handyman to do some repairs to your house and buy veggies from a farm stand. Don't get fooled into thinking it's your civic duty to charge a $200 pair of made-in-China jeans on your Abercrombie visa.

Guest's picture

poster #7!

Guest's picture

poster #7 too.

Though I don't have a problem with limited "propping" (depending on what you actually mean by that).

Guest's picture

"Propping", in the sense of bailing out failed private businesses with taxpayer funds, is a bad strategy. The only way capitalism can work is if those businesses which can't make a profit by their own efforts are allowed (maybe even encouraged) to go out of business so that the labor and material they command can be put to more productive use elsewhere.

"Propping", in the sense of helping our fellow-citizens get through tough times, is a rational and compassionate strategy. There is a world of difference between helping your laid-off neighbor and sending gargantuan amounts of money to the likes of AIG and Goldman Sachs.

Guest's picture

Excellent article. I hope that the U.S. savings rate continues to increase. Many Asians save 15-20% or more! Let's do it!