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What the Dramatic Turn in the U.S. Saving Rate Could Mean to You

Economics / US Economy Jun 10, 2009 - 04:22 AM GMT

By: Money_and_Markets

Economics

Best Financial Markets Analysis ArticleClaus Vogt writes: During the past few weeks of exciting “green shoot” news, a very important economic statistic has been ignored: The U.S. saving rate.

U.S. citizens have been saving less and less since the early 1980s. And the saving rate even turned negative during the height of the real estate bubble.


But in April, the personal saving rate in the U.S. surged to 5.7 percent, a 15-year high. That represents a massive trend change and has important consequences for the future. But before I address them, I want to remind you of …

The Formula for Prosperity

Let’s start with an example of a very basic economic thought …

By following the simple formula of 'save and invest' over long periods, individuals — and nations — grow wealthy.
By following the simple formula of “save and invest” over long periods, individuals — and nations — grow wealthy.

You can use the results of working at your job in two distinct ways: Either you consume, or you save. If you consume all the results of your work, the whole story ends immediately, no wealth is generated.

However, if you sock away some money, the savings are invested — either directly or indirectly by using an agent such as a bank. In other words, as long as you don’t hide your savings in your mattress, the money is being put to work someplace else.

The goal of investing is to have more money in the future than you have now, so that you are able to consume more in the future than you can in the present. This is the very definition of wealth generation. And by following the simple formula of “save and invest” over long periods, even over generations, individuals — and nations — grow wealthy.

Bottom line: Saving is the precondition to wealth generation. There is no way to short cut or fade this economic law. And this formula does not work backwards, meaning that it is impossible to consume or to borrow one’s way to prosperity.

So a Nation’s Saving Rate Is Very Predictive of Its Ability to Generate Long-Term Wealth

Personal Saving Rate Plunges …

During the second half of the 1990s, the U.S. saving rate started breaking down. That’s because Alan Greenspan’s stock market bubble kicked in, and people had the illusion of wealth generation without the need to continue saving.

Look at the following graph that shows the personal saving rate since 1959, and you’ll see what I mean …

Personal Saving Rate

Notice that in 2001 the saving rate hit the zero mark for the first time, and then got even worse!

Reason: Greenspan’s monetary policy started the biggest real estate bubble of all time, and people were further lured away from the concept of saving. They took on debt like never before. They relied upon rising stock and real estate prices to take care of their future prosperity.

To make matters worse, this absurd idea was massively promoted by the central bankers who never called the bubble for what it was. They even tried to rationalize it instead of issuing appropriate warnings.

The rest is history: The bubble burst and together with it the dreams of millions of people. And the worst financial and economic crisis since the 1930s started to evolve.

Thanks to the Current Crisis, It Seems as if Americans Have Finally Come to Their Senses!

Over the past few months the situation has changed dramatically. The wealth illusion, which was fostered by the Fed-induced dual bubbles, is finally gone.

The Baby Boomer Generation, some 78 million strong, has realized that planning on rising stock and real estate prices to meet their future needs has led to huge losses.

This wealth destruction has unveiled a massive gap in retirement provisions. All of a sudden many Baby Boomers have started to worry about how to finance their old age. They’ve suddenly realized that consumption and indebtedness are not the way to prosperity. Consequently, they’ve started to cut back spending and save more.

In fact, shortly after the recession started in late 2007, the personal saving rate surged from zero to 5 percent. A short pullback followed. But then what looks like a new and healthy uptrend developed.

The U.S., world capitol of the “buy now, pay later” attitude, is undergoing a huge shift. Saving is making a real comeback.

This change in attitude is in all likelihood just the beginning of a long-term trend that will be with us for many years to come. In fact, I expect a lasting return to the country’s former saving rate of roughly 10 percent.

The Consequences, Both Good and Bad …

To close the gap between their current assets and their retirement needs, Baby Boomers will have to save more and spend less.
To close the gap between their current assets and their retirement needs, Baby Boomers will have to save more and spend less.

Saving is the precondition for a better future. And finally Americans are abandoning the track of more and more indebtedness, which unquestionably leads to decline and poverty.

So long term, a rising saving rate is very positive. It’s laying the foundation for future growth and prosperity.

In the shorter term though, this trend has rather unpleasant implications, particularly in the area of consumer demand for goods and services.

As I already mentioned, Baby Boomers are now facing retirement and don’t have much time left to close the gap between their current assets and their retirement needs.

So they will have to cut back their spending, which does not bode well for the economy or the stock market.

Do not underestimate the importance of this shifting trend!

Best wishes,

Claus

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

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