Monday, December 20, 2010

National Savings Rate Negative

The chart below shows the national savings rate (net savings of individuals, corporations, and the government). What we see is that for the first time since the Great Depression the aggregate savings level turned negative and is still negative.

What does this mean? It means the economy has been reliant on external sources of financing for our current level of consumption, which is sustainable… until it isn’t. Put another way, maintaining our current level of growth isn't completely in our hands at the moment.

This will either reverse at some point in the future with:

  • Absolute savings increasing through a higher savings rate, which will cause the economy to slow (all else equal) as we get our balance sheet in check (i.e. what is going on in Europe)
  • The growth of the private sector, which will allow the absolute level of savings to increase without a large increase in the savings rate as a percent of GDP; the denominator will grow, rather than the numerator in the savings as a percent of GDP ratio (i.e. the goldilocks scenario)

Source: BEA