The Impact of Low U.S. Savings Rates

NEW YORK (TheStreet) -- The United States is overly indebted at all levels, but the concern here focuses on households. Families think of savings as any change in wealth, including income that isn't spent immediately but also capital appreciation of previously accumulated assets. An economist's notion of savings is deferred income.

Personal income not spent on consumption is saved. In the aggregate, savings influence what is available domestically for business investment and the size of the imbalance between savings and investment determines the directionality of capital flows with other countries and whether a country is in chronic current account deficit or surplus.

The U.S. savings rate ranged from 6.5% to 9.9% in the 1960s, 8% to 14.6% in the 1970s, 5.8% to 12.2% in the 1980s, and 2% to 8.9% in the 1990s. Having gone below 1% earlier this decade, it recovered to a decade high of 5.9% in May. The problem with relying upon markets to do the heavy lifting of saving is that asset prices swing excessively up as well as down, and excessive bull markets do not persist forever.

Rather, things have a way of evening out, so a 16.9% per year rise in the Dow Jones Industrial Average in the 17-1/2 years between August 1982 and January 2000 is followed by a 1.4% per year decline over the ensuing decade. The destruction of wealth during the "Great Recession" created a powerful incentive for families to hunker down, rebuild savings and postpone consumption.