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Pastimes : Let's Talk About Our Feelings!!! -- Ignore unavailable to you. Want to Upgrade?

To: MSB who wrote (73771)	2/2/2000 10:44:00 PM
From: Neocon	Read Replies (1) \| Respond to of 108807

What's up (down) with the Savings Rate? Dateline: July 14, 1999 (John Irons) The personal savings rate in the US has been falling steadily over the past several years; and, recently, it has even dipped below zero. This overall long-term trend has been a bit worrisome to many economists, but it is the most recent part of the trend that leaves many of us scratching our heads as to why the rate has taken such a dramatic dive since it's local peak in 1992. Here's my list of possibilities. Possibilities: Credit cards have become more common. In econospeak the we say that the "liquidity constraints" are looser. The argument goes that 20 or 30 years ago people with little or no savings would have liked to have spent more, but couldn't go into debt. The ubiquitous credit card has made this easier to do today. The growth of personal debt seems to be the other side of the coin. Stock market is booming. With a booming stock market, those people lucky (or smart) enough to have put money into the market have seen their net worth rise at phenomenal rates. These people are thus wealthier and are spending a portion of this accumulated wealth. The measured savings rate compares savings to current income - missing this "wealth effect". (Savings out of total income - including the change in asset values - could remain the same, while measured savings would decline). People are expecting higher incomes in the future. The decision to save is a decision of how to allocate spending over time; therefore, what people expect to happen in the future will impact how they behave today. If you win the lottery today, chances are you will start spending before the check arrives in the mail. If people are expecting the economy to keep booming, and bring with it a higher paycheck or bonus at the end of the year, they won't necessarily wait to go out and splurge on that new DVD player today. Since their current income hasn't changed, and spending has increased, the savings rate will dip. People are expecting higher prices in the future. It's hard to watch any economic or financial market news these days without hearing worries about increasing inflation. If consumers are thinking that prices might start to increase soon, they'll go out and buy that Ford today while they think the prices are still low. (Creating expected inflation is what some are arguing Japan needs to do to get out of their slump; maybe they should follow our example.) This shift in consumption from the future to the present will lower savings rates (but will increase them down the road). People are expecting higher interest rates. If the prospect of higher inflation is giving Alan Greenspan the jitters, consumers may worry that interest rates may go up in the future. This would give people an incentive to purchase those big item purchases now in order to lock in low interest rates. Again, this would shift purchases from the future to the present. Simple demographics Grandma spends much more than she earns. As the population ages, the number of people who are actively spending down their wealth is increasing. This is a natural result of the demographic trends in the US. People are expecting a tax cut Washington is all a buzz with talk of how to spend the surplus. Tax cuts are at the top of the Republican agenda, and there doesn't seem to be much opposition (provided some of the money is put towards paying down the debt - i.e. "saving" social security.) Again, if people are expecting a gift from Washington next April, why not spend some of that now? What, Me Worry? It's hard to get too worked up over the decline in savings rate. Of the above reasons, 4 predict a rebound after a year or two (the ones that involve expectations). The credit card trend (which helps magnify the other causes) has certainly made my life a lot nicer - no complaints here. And I'm not going to tell Grandma she can't take that vacation to Florida this year. What really matters is the total national savings - personal savings plus government and corporate savings. Given the reduction in budget deficits, national savings has been rising from it's trough of 13.8% in 1992 and is currently around 17% of GDP - a little low, but within the normal range for the past 20 years or so. Recent drop, 1992. The rate was near 10% in 1982, and dropped to around 6% in 1985 holding steady through 1992. Then the recent falls in the rate began in what appears to be 1992, an election year. Coincidence? Perhaps having a Democrat elected to the presidency spurred consumer confidence, or consumer irresponsibility, depending upon your party affiliation. economics.about.com