Low Savings

Americans on average, save less than 1% of their after-tax income today compared with 7% at the beginning of the 1990s. U.S. citizens are saving less because, of the higher cost of housing and interest rates. Many homeowners believe that rising real estate values give them the necessary savings they would otherwise have set aside. The housing boom, like the stock market boom before it, allowed Americans to save without having to reduce consumption. As the value of their assets rise, people naturally feel richer.

Consumer spending has held up not because incomes have risen, but because consumers have taken on more debt, mostly by borrowing against rapidly rising housing prices. The marginal propensity to consume is affected by consumer confidence and interest rates as they affect the rate of return on savings.

With fewer dollars available as savings to banks and other financial institutions, interest rates are higher for both savers and borrowers than they would otherwise be. That makes it more costly to finance investment in factories, equipment, and other goods, which slows growth in the GDP.

The lower savings rate meant a higher consumption rate, which stimulates more spending, more income, and thus more spending, in a self-feeding process known as the multiplier effect.

People do not save for the sake of saving. They save to spread consumption over their lives.

Also the U.S. has a consumer culture, with consumers always having to "keep up with the Joneses" Kids seem entitled to deserving goods that other kids own. Since consumers will be spending more rather than saving, equilibrium GDP will not be balanced. Unemployment and inflation will occur since low spending by investors does not balance the low savings rate of consumers.

Our high consumption, low savings economy has worked only because our European and Asian allies have been willing to save and produce more than they consume. Our U.S. economy has become too dependent on consumption that has to be financed by borrowing from our foreign countries. Increases in consumption mean decrease in savings. I believe the U.S. savings rates are under measured because of changing asset values like the high cost of housing.