Tuesday, March 03, 2009
Saving more
Here is a pretty cool interactive graph of the history of the savings rate in the United States. It is obvious that savings have soared in recent months, an unsurprising consequence of the massive deleveraging throughout the U.S. and global economy.
The other nifty thing about this graph is that you can change the duration of the graph's time period with the slide at the bottom. You can change the slope of the trend in the savings rate, or even its direction, by manipulating the period of measurement. In that regard, it is an implicit warning that we should beware graphs that purport to show a dramatic trend in a data series from some arbitrary date or point of departure.
7 Comments:
By 
Brian, at
Wed Mar 04, 03:10:00 AM:
"We should beware graphs that purport to show a dramatic trend in a data series from some arbitrary date or point of departure."
You should point that out to the global warming skeptics who comment here. They worship the year 1998, but no other year has meaning to them.
By 
, at
Wed Mar 04, 07:14:00 AM:
Another graphic that has to be viewed in IE for the full effects. Does no one ever test their web page applications? There are other - much safer - browsers out there.
By Dan Kauffman, at
Wed Mar 04, 08:47:00 AM:
Try Avant or Orca or Safari or even the newest version of Firefox it seems to work just fine for me.
I am a browser hog ;-)
I am however running Windows XP Pro
By , at
Wed Mar 04, 09:13:00 AM:
I'd be interested in hearing speculations as to why a relatively stable savings rate of between 6 and 10% decline so precipitously in 1993-1994. Anyone have any idea?
It would also be neat to match the savings rate against the rate of change in housing values over the same period. Money not going into savings might well have fueled investment in too-expensive homes, or speculative investments in other real estate. Did people sacrifice their savings, hoping to get rich quick or because they thought home values were a better savings vehicle than old fashioned savings accounts?
By Georg Felis, at
Wed Mar 04, 09:26:00 AM:
It also would be of interest to compare the same numbers to the relative amount of unsecured (credit card) and secured (mortgage) debt over the same period, for the various demographic groups (i.e. are people getting close to retiring managing to get their homes paid off and off the Visa addiction, are kids right out of college running up astronomical plastic debt, etc...)
By MTF, at
Wed Mar 04, 09:32:00 AM:
Weren't there federal tax rate increases that kicked in at that time?
By Viking Kaj, at
Wed Mar 04, 11:04:00 AM:
With regards to the drop in the savings rate since 1992, my suspicion is that it has something to do with real rate of return on savings deposits. Looking at this objectively we have had a relatively low federal funds rate since the 1992-93 recession. Since 1992 the rate hasn't gone over 6 percent while in the 1970's and 1980's it was routinely in the 6-11% range. While I haven't completely coorelated this to the inflation rate, inflation in the 1980's (other than 1981) was in the 3-6% range while in the 1990s (other than 1990) it was in the 2-3% range. I have also read that there are problems with the way the inflation index is calculated by the federal government which have tended to understate inflation in the 1990's and 2000's. I don't think I've heard anyone lately bragging about keeping lots of money in a money market fund like you did in the 1980's. And people that have invested in CD's over the last ten years have been viewed as chumps.
So savings for a lot of people since 1993 has not seemed like a rational proposition, since the rate of return is so low compared to what has gone on in the stock market and with housing prices. There should be a clue in the fact that for high net worth inestors the hottest ticket going were "hedge" funds, which rely upon lot's of leverage to increase returns. Of course a big part of this run up can be explained by the inflationary effect of the cheap money, which has encouraged everyone to become leveraged to the hilt and irrationally drive up prices. You can't have real income going up by 3-4 % and housing prices going up 30-40 % a year forever, like we had in early late 90's and early 00's. That's the bubble that we are now have to resolve. Most of that air will have to come out of the housing market, and since most people have most of their assets in, and are emotionally attached to, their homes this isn't going to happen quickly or without pain. Try telling someone on Long Island that the house they think is worth $ 690,000 because they are looking at 2004 is actually worth $ 240,000 because they should be looking at 1996. A lot of real estate agents base prices on comps, which also isn't very helpful in a deflating market.
That's the problem right now. As TH has noted, the average person is now massively overleveraged and is trying to unwind that proposition. Since most of the growth in the US economy over the last 10-15 years has been the result of consumers taking on more debt. That's what government is now trying to get us to do again. Since we aren't going to be able to use our homes as ATM's again anytime soon, there may be a flaw or two in the government's reasoning on how fast they can get things going again. Their predicion of a V shaped recovery in late 2009 is based on this reasoning, but I think we are looking at something more like a U or a hockey stick.
Longer term as a society we need to encourage the savings rate and also ensure that our government lives within its means. The alterative is an economic debasement that will ultimately cause problems for our democracy. Unfettered spending on the military is just as bad in this regard as unfettered spending on social programs.
But short term, if we don't start spending more money, this is going to hurt worse, a lot worse.
