Americans Becoming Savers, Can This Be Good Economically?

Author: David Yee
Created: 23 May, 2016
Updated: 17 October, 2022
3 min read

Gallup reports that Americans' attitudes have significantly shifted from the Great Recession, to becoming a nation that is twice as likely to save with disposable income as consume.

If we learned anything from the Japanese recession during the 1990s-2000s, it should be that an economy cannot and should not operate as 'net savers.'

While completely counter-intuitive to basic economic theory (i.e. one person's savings is another's source for investing), there is a limit to this and also what businesses can or will invest in any given circumstance. This 'excessive savings' only serves to further drag the economy down. In particular, consumption is always the primary signal for a business to grow -- not the availability of investment capital.

Under all circumstances, personal consumption is always the primary driver of the economy--not investment, trade, or government spending. Once members of an economy become convinced that savings is the correct course of action (and it might just be the correct course of action for their personal finances), it tends to have disastrous effects on the economy as a whole.

Japan was forced to try to coax consumption by employing an effective negative interest rate on savings, something the U.S. has been close to having under the tight monetary control of the Federal Reserve.

Americans are carrying fairly large credit card balances. As some commentators note, Americans are probably willing to put up with a government drowning in red ink because they see the same pattern in their own finances. We live in a 'pay for it tomorrow' society -- from Washington D.C. to Main Street, nobody wants to pay the piper.

This is a horrendous double-edged sword. Paying down the debt, from the personal perspective has the net effect of saving, yet paying the debt down also destroys wealth in the system (the debt is held as an interest bearing asset by a bank).

Even worse, the consumption from this debt took place long ago; the debt service is no longer driving the economy (and yes, the interest paid is still a part of the current GDP, but consumption drives the economy -- not borrowing).

But the real worry that Americans have is uncertainty: politically, socially, and economically.

IVP Existence Banner

We are living at a crossroads where people are really pondering what will happen in the next few months and how it will change their lives for the future.

Early in 2016, world economists were projecting a bear market, one so bad that they recommended fully dumping stocks.

Right now, Americans are sitting at the lowest stock market participation-rate in modern times, with only 52 percent of Americans holding stocks in any form (stock, mutual funds, self-directed pensions, 401ks, or IRAs), and it is the middle class that is fleeing from the markets the fastest -- and the markets are showing a dip from this exit of buyers and holders from the marketplace.

So how do you convince a nation to start spending again?

Americans need confidence right now, from our leaders, our economy, and our prospects for the future.

The next president is going to have to focus on rebuilding Americans' confidence first, if we want to come out of this potentially daunting economic crisis of non-participation.

And we are left with the worst, starkest horror possible: Two primary presidential candidates who are really not inspiring confidence in anyone, let alone large swaths of their own party's membership.

We might as well resolve ourselves into accepting that November's results aren't going to change the economic fundamentals too much, and we may just be in for the predicted long bear economy.

IVP Existence Banner

Photo Credit: pathdoc / shutterstock.com

Latest articles

Glenn Youngkin
The Irony of Gov. Glenn Youngkin Vetoing a Ranked Choice Voting Bill
Virginia Governor Glenn Youngkin has said no to a bill that would clarify how ranked choice voting (RCV) is supposed to work in local elections -- which is odd considering the only reason Youngkin is governor is because of a RCV nomination process at the 2021 Virginia GOP convention. ...
12 April, 2024
3 min read
Trump and Biden Debate
If Trump or Biden Don't Want to Debate, Give The Stage to Someone Else
Major national news outlets reportedly are drafting an open letter to President Joe Biden and former President Donald Trump's campaigns urging them to debate this fall. Biden has threatened not to debate at all, and Trump doesn't have a solid track record committing to debates....
10 April, 2024
3 min read
Electoral College
The Electoral College Reform the Nation Needs is Not What Either Party Wants
Nebraska is one of only two states that has a system that awards its Electoral College votes based on the popular vote in each of its congressional districts. However, there is a contingent of state lawmakers who want to change this with the support of former President Donald Trump....
08 April, 2024
11 min read