Low Us Savings Is It A Problem - Road to the Middle Class

ONE OF THE concerns of enlightened elite opinion recently has been a worry over the lagging US savings rate. Compared against any nation you like, the US savings rate comes in at the bottom. But like the balance of payments problem, another worry of concerned elitists, the question is: Is “the problem” a problem?

The balance of payments is always in balance, wrote Ludwig von Mises half a century ago. He meant that if the US runs a balance of payments deficit in, say, merchandise, it merely reflected the choice of millions of consumers and thousands of producers. It means that Americans want to buy goods, and foreigners want to hold American paper: dollars, debt, and equity.

In NRO, John Tamny weighs into The Wall Street Journal’s David Wessel for worrying about the savings deficit, that we need to wean ourselves from “from growing dependence on the savings of Asians and Europeans,” and that the US “consumes more than it makes.”

The problem with this received elite opinion is that is flies in the face of some awkward facts. If we are dangerously dependent on foreign capital, why are interest rates so low? And if low savings is such a problem, why does US national wealth keep going up?

The answer is that the US does not have to save because our economy generates wealth.

[Data] last month from the Federal Reserve show that U.S. household net worth hit a record of $49.8 trillion, up roughly $5 trillion in the last year alone. Notably, those gains were split almost equally between residential real estate and financial assets.

High savings rate is an indication that the economy is not throwing off the increase in wealth that people need to provide for the future.

the best way to boost the savings rate would be for both the housing and stock markets to collapse. Americans experienced just such a thing in the early 1980s when stocks were still mired in a multi-year slump and home prices were crashing. Amidst those capital losses, the savings rate unsurprisingly reached double digits.

To put it bluntly, Americans save when the economy is in the tank.

The bigger question is: Why do foreigners want to put their money into American debt with its low returns? Why aren’t there better risk-reward propositions out there?

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Christopher Chantrill blogs at www.roadtothemiddleclass.com. His Road to the Middle Class is forthcoming.