The US personal savings rate has been in the news a lot recently because Americans seem to be saving more than ever. According to the Bureau of Economic Analysis, the personal savings rate reached a 15-year high in May at 6.9%. This means that for every dollar an American earns, he or she is putting a whopping $0.069 in the bank for a rainy day.
While that may still seem pretty low, believe it or not, since 2000 the personal savings rate has been much lower- even dipping below zero at times. The average American was living well beyond their means through maxing out credit cards and taking advantage of readily available home equity loans to spend, spend, spend.
To most people, an increasing savings rate seems like a good thing, and it is in many ways. That said, our rampant spending helped to fuel the economy, and in boom times spending more created more jobs which, at least in theory, put more money in everyone’s pockets.
This principle falls apart when people start borrowing more money than they can pay back (think housing crisis). Combine that with the increasing dependence of the US economy on foreign products and foreign companies (think buying products from China, but people in China not buying products from America), and an extremely low savings rate is unsustainable.
The same principles that govern personal debt apply to our national economy. What we are experiencing right now in the US economy is the result of spending beyond our means and banking on unrealistic capital gains. People acted as though the good times would never end and began to spend money they did not have.
I’m reminded of a buddy I had in college who loved to party. While at a party, he lived it up like the night wasn’t going to end. Unfortunately, sometimes his decisions while the good times were rolling resulted in paying the price the next day in the form of physical illness and embarrassment. As a nation, we are now waking up and paying the price for decisions made while the spending party was going on.
Although spending less can potentially extend the recession, we need to be more conservative with how we use our money. In the end, saving more money helps us be prepared for the unexpected and provide for ourselves and our loved ones.
Additionally, whenever the recession is over, our economy will hopefully be weaned from its addiction to out of control spending. The only way for this to happen is for us as individuals to wean ourselves from making unwise purchases.
