Going for crazy broke

November 1, 2011

Why aren’t Americans still saving?

James Saft is a Reuters columnist. The opinions expressed are his own.

A look at the fall in the U.S. savings rate raises one crucial question: are Americans crazy, or just broke?

The answer may hold the key for whether the country is headed for another recession or a policy-engineered recovery.

The personal savings rate fell in September to 3.6 percent, the lowest since December 2007. Given that household balance sheets are still under stress from tumbling housing prices — and tiny rates of savings for much of the last decade — this makes little sense as a strategy.

If anything, the past 20 years should have taught Americans that their expectations about how fast their assets can grow, and how likely they are to be dealt a financial blow like illness or unemployment, were too rosy. Conventional wisdom in the wake of the great financial crisis was that savings were headed higher and would stay high for a long time. Many people in the U.S. were working a financial high-wire act without a net and needed to reduce risk.

Things have not turned out that way. The savings rate did claw its way higher in 2008 and 2009, ranging mostly in the 5 to 5.5 percent range, but started to head south this summer and has now been falling for three straight months.

A turning away from savings makes a certain amount of sense. After all, almost all of the policies put into place since late 2007 have been designed to transfer money out of the pockets of savers to cushion borrowers. Real negative interest rates punish those who have saved, forcing them to either live with very low returns or take on commensurately higher risks.

At the same time policies intended to aid the housing market have managed to reduce outgoings for many borrowers without actually lifting prices, which would share the benefit between borrowers and those who own their homes outright. A new round of mortgage bond buying by the Federal Reserve, something that is in the offing, might only further reduce loan costs without lifting prices.

All of this makes a depressing backdrop for savers, and some may have decided that the rewards and risks of thrift don’t add up and can’t keep up with the pleasures of spending. In its own way, this would be a triumph of monetary policy, as the Federal Reserve will have coaxed people to do something that is arguably against their own best interest in service to the, perhaps, larger goal of cushioning the blow of deleveraging.


So, if households are spending because they don’t see the point in saving, score one for the Fed. There may be a simpler explanation, and a look at last week’s surprisingly strong U.S. gross domestic product figures helps to explain.

While consumer spending helped to drive GDP to a 2.5 percent annual growth rate, the stuff people were spending money on was telling. Spending on health care and utilities was the main impetus behind the consumer contribution to growth, and after all those are things it is really hard to cut back upon. And this is happening within a context where there are increasing signs that Americans are putting off or forgoing medical care for economic reasons.

Really it seems that people were not saving because they simply did not have the money. That makes it much harder to look at recent data, some of which has been reassuring, and conclude that the risk of another recession is past.

“The hallmark of the Q3 GDP report is that a massive and unsustainable gap has opened up between incomes and spending,” Gluskin Sheff strategist David Rosenberg wrote in a note to clients.

“If we don’t soon start to see personal income growth revive, then consumer budgets are going to be staring a contraction in the face.”

If that contraction does begin to emerge, then the safe bet is that the Federal Reserve will dish up more of the same kind of policy in response. Already several Fed officials have raised the possibility of another round of mortgage bond buying. While it is hard to argue that the housing market is at the center of the economic malaise, cheap financing so far does not have a good track record.

One thing is clear, at some point the savings rate will have to rise. Putting that off for a time may help ease the pains of deleveraging, but only by extending them. That is a temporizing measure rather than a solution.

Asset markets aren’t priced for the rise in savings, but some day, when the policy drugs wear off, they will be.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Yup, saved for decades, own our home outright, we’re debt free and we’re now slowing going broke.

I used to have about $1,000.00 a month in discretionary income (same for my wife) now due to very low investment returns (which are partially our own fault as we are out of the equity and bond markets and mainly in cash) and continually rising prices our discretionary income for next year will be about $400.00. You see we keep a budget, and stick to it, so our “mad money” keeps dwindling as our household expenses keep rising and interest rates stay low.

I guess we’re lucky to still have “mad money”?

We’ve cut back everywhere and have seen price increases everywhere. Groceries up 5.5% YTD, insurance up, utilities up, medical expenses up, cable, internet and phone way up. We’re looking at putting an antenna back on the house next year and saying bye, bye to TWC.

The only thing that stayed stable was property taxes. But wait! I’m wrong. The taxes stayed stable because the assessment on the house went down! So they really went up!

I have to go now. I’m so upset about all this I need to go buy something. 😉


Posted by Missinginaction | Report as abusive

Just plain broke. I’m with MIA, discretionary income is dwindling fast. We have stopped eating out almost completely. The price for a dinner out for me and my family has almost doubled in the last two years. If you take the increases that MIA mentioned and the out of control increase in gas prices there isn’t any money left to put in savings. Gas prices near me got to about $3.70 this summer. Next summer it will be over $4. They prices have not gone down hardly at all this winter like they have in the past. Big business and executive management have all of our money.

Posted by okcnyyfan | Report as abusive

Duh, interest rates are .05%. You think I am going let banks use my money at that rate. I’d rather put it under my mattress. Take that banks and federal reserve. You think Americans are stupid – you are wrong!

Posted by minipaws | Report as abusive

I have a number of 5 year CDs, One of them comes due this month. Right now I am getting 5.5% on it. If I renew it, I think I can get maybe 2.5%. Pretty big drop. Obviously that will translate into a lower savings rate for me. The math here is pretty easy. Obviously for a lot of people, especially older folks, savings rates will continue to drop, and so will spending.

Posted by 123456951 | Report as abusive

There are many issues at play here. While the Fed is busy lowering interest rates and buying mortgages, local and state governments are jacking up tax rates to make up for the lost revenues from lower real estate prices. In the mean time why bother putting your money in the bank when they pay such a poor rate of interest; there are alternatives but they put the average householders precious capital at risk, and these days they can’t afford to lose it. And the really good news is nobody is getting a raise. So, there is no inflation, just real price increases.

I can only conclude that such masterful fiscal and monetary policy will result in a nice prolonged stagnant economy. If Americans are lucky, they may even get a severe recession which would give them ample excuse to toss the rascals out of power and institute meaningful reform. My only fear is that they won’t get that lucky and the same old lame policies will stay in place.

So the new lifestyle for the average householder will be how to make jam, mend your own clothes, insulate your house and raise chickens or rabbits. Life was never so good. Gardening vegetables in the back yard will be a serious business, not just because you like them fresh.

Oh, what was that part about a successful policy engineered recovery?

RW McCoy

Posted by rwmccoy | Report as abusive

“While it is hard to argue that the housing market is at the center of the economic malaise,”

It isn’t? Nothing seems to have sold in years around my neighborhood. There are a lot of permanent “for sale” signs and, even more rare: vacant houses. And the assessments still haven’t dropped and neither have the property taxes. The assessments are still at the peak and the property taxes are rising. I don’t think the town is just picking on my house but to get more accurate property tax information, I’d have to talk to the Town Clerk and she’s an ugly b…h. Property records are public information and they still aren’t on line here without a password. I asked for one and they don’t give them out to anyone but town employees. They are the people who know the whole tale and they don’t share info expect to friends, no doubt?

There has been no new construction in many years. The last new house on this street, or even this whole neighborhood, went up about 4 years ago, or just a year or two before the bottom fell out. The last new houses tended to be modular homes that were trucked in and deposited in a day or two. One showed up so fast I literally didn’t notice it until I saw it when I went out one morning. I work out of my home and didn’t even hear two flat bed trailers coming up the hill to deposit the 48-foot units. The modular units do little or nothing for local employment or to boost the local economy. It is now vacant and the foreclosure auction signs are still sitting on the streets long after the sale. Someone is paying the taxes or it will be abandoned to the Town sooner or later. And only a few cars ever came up to inspect it.

Construction spending was the engine of this and so much of the national economy. If vacant houses aren’t selling they may have book value only. My house is full of stuff that has book value only. There was a brief movement up here a year or two ago of giving away things, like barely used furniture, for free. That could catch on, but won’t pay the staff.

A country that is experiencing economic growth because of the high cost of medical bills is a nursing home in all but name. Nursing homes are notorious for milking their inmates until the insurance runs out. What happens then?

BTW – the cost of making jam is much higher than buying it in a store. I tried to do that as a hobby and to use the blackberry bushes that still grow on this lot. The cost of the jars and seals is more than it costs for the commercial product and that doesn’t count the cost of the time, the sugar (jams and k jellies are mostly sugar) and the pectin. You’d better recycle the jars and get them back from friends, over and over again.
If you want to take a chance, you can reuse the seals once more but after that there is a much greater risk of botulism.

And I have recently heard that a chicken can be grown commercially in about 18 days? I will look that up sometime. It sounds indecent if not impossible: but maybe not so bad for the chicken?

Posted by paintcan | Report as abusive

I don’t know whether to laugh or cry that our government has proven itself as clueless as I have always believed it to be. Here’s what I see going on (and I’m no economist):

Our economy is horribly dependent on consumer spending and an expanding population (to provide more spending, and taxes from those we manage to educate).

“Our” government has intentionally and steadily eliminated every “reward” for saving. Interest available to the average person is at a rate clearly less than the “real” loss of purchasing power.

Federal policy for the next several years is “on record” as being more of the same. Inseparable from such policy are stealth tax increases as ever more dollars are printed and distributed into our economy and that of the world, inevitably reducing the value of each).

The assault of inflation on liquid assets somehow “put aside” for retirement, our children’s education, or a rainy day put into stocks earn little at year’s end due to associated risks and frustration of an unsustainable world economy. They lose value if we put them in a bank at prevailing interest. They lose value if we put them in our mattress. Only gold is a credible investment strategy, and politicians can manipulate that market and ownership laws to deny us the reward for such prudence at any time.

So spending becomes our single viable alternative. But to spend intelligently without “living beyond our means” is not easy. If they are old, this is a good time to replace old washers, dryers, air conditioners, cars, refrigerators, all “durable goods” that we will need in the next decade and beyond.

We can buy and stock a freezer with meat we know will be higher in the next year, but peanut butter before the price jumps due to the bad harvest, etc.; but these are small amounts and short term “positions” in “personal commodities. A freezer without a backup generator and gasoline is not a good “strategy”.

We can’t buy gasoline for our vehicles and hold it because what refineries sell us these days goes bad in less than a year, and many citizens would likely blow up their residences trying to store and/or transfer it. Tires and certain foods like dry beans, rice, etc. can last for years if properly stored, and canned goods (those one NORMALLY eats) are good up to a decade. Engine oil does not go bad, and continues to increas in price.

It’s a good time to do home additions or renovations that are NEEDED. Materials will only go up, and many skilled workers presently need work and bid or work directly for less than when times arew “good”.

It will be prudent for those that can do so to turn over much of suitable back yard area into “victory gardens” that will produce food of known quality and reduce our individual reliance on a “just in time” economy that results in bare store shelves when power fails or the trucks don’t run. I suggest rural landowners take appropriate steps (while they can) to best transition to an age in which water becomes the “new gold”.

We live in “interesting times”.

Posted by OneOfTheSheep | Report as abusive

Employer-provided health insurance costs for me have almost doubled since the Affordable Care Act passed, energy costs are up around 40%, and food costs are up around 30%. Gross income is down 10%. Even with zero debt and a good job, times are hard.

Posted by wwd | Report as abusive

Unlike some countries, where the level of subsidization of individuals is much greater than that of the US, American’s are having to use their savings to make it through this economic downturn.

We may look worse off now, but we’ll also be the first to make a significant, long-term, recovery while other countries continue their social subsidies.

Posted by IMOO | Report as abusive

http://www.cepr.net/index.php/blogs/beat -the-press/national-income-accounting-fo r-the-washington-post-and-robert-samuels on

As long as we have a balance of trade deficit either the goverment runs a deficit or have low savings rate. The money has to come from somewhere.

Posted by bumticker | Report as abusive

Having read a few of the comments of you good people from America let me say, if your politicians and our pollies here in Australia wouldn’t be so hungry of power and stopped looking for the next opinion poll and/or election the world would be a much better place to live in.

Posted by AussieRoo | Report as abusive

One huge problem with this op-ed piece is that Saft doesn’t define “savings”. Are we talking the traditional definition – money into savings accounts? Or the “personal savings” rate – which is often quoted but which includes debt repayment? Neither rate counts investment as savings, which means that most retirement accounts – IRA and 401Ks – which mostly go into stocks, are consider NOT savings.

Without more data, Saft doesn’t give himself or us enough to go on. Is savings the way people define it really down, or has it just shifted more to investment?

Posted by SeattleTony | Report as abusive

“One huge problem with this op-ed piece is that Saft doesn’t define “savings”.”

It’s standard economic term. You just showed your ignorance.

Posted by advocatusdiabol | Report as abusive