High Savings, High Debt

One thing of note in the ongoing economic discussion is whether or not the high savings rates make sense for America while they appear to portend and end of the American consumer.Starting near the top, the classical Keynesian model says the biggest driver of economic growth is progressive declines in the private savings rate. In other words, the less people save/the more they spend, the higher GDP will be. Moreover, the Kaynesian model says savings rates have more impact than any other piece of the puzzle.

While Keynes’ model has been justly critiqued and improved, or even as some would argue dis-proven, the idea that there exists a fundamental link between the private savings rate and overall consumer spending and thus overall GDP is both prevelant and sensible. People can’t spend money they’re saving, and that means manufacturers would be producing less to meet less demand, etc.

However, there are two observations to be made at this juncture. First, the American consumer basically spent everything they could get and then some for most of the 90’s, pushing the overall savings rate to zero or perhaps even negative. Recall, for isntance, the hand-wringing about too many people with too much credit card debt, too big of a house, and too expensive a brace of cars. Pile on the worry about new college grads with massive college loan debt and it starts to sound like America is swimming in IOU’s.

Then we get an economic downswing. The most vulnerable people during such events are those who are most indebted. Even if you’re well positioned, this one has been big enough to worry almost everyone. People start to save to prepare for unemployment including cutting down their debt load and start refusing to take out new loans for new spending. They start cutting back on the $5 morning lattes and defer the new car for a couple years. With housing prices soft, people are deffering the home upgrades and without a rosy outlook that means to home improvement projects.

So maybe the 6.9% savings rate in the USA right now makes some sense. GDP down as much as it is is a problem. Unemployment where it is creates problems. However, the savings rate might just make sense, and given the amount of time we spent lamenting it beging too low, perhaps there is some irony in lamenting it being “too high” now.


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