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Why Americans Are Pitiful Savers

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Princeton historian Sheldon Garon wrote a great article for the Federal Reserve recently. "Beyond Our Means: Why America Spends While the World Saves," is the title.

After World War II, Garon writes, most of Europe and Japan "ran massive savings campaigns" to encourage people to save to help finance wartime debt. "Thereafter, enduring cultures of thrift continued to restrain the expansion of consumer credit," he writes.

Not in America, though:

After 1945, however, America again diverged from patterns of savings promotion in Europe and East Asia. The United States emerged from World War II extraordinarily rich while other countries were rebuilding war-ravaged economies. Politicians, businessmen and labor leaders all encouraged Americans to spend to foster economic growth. An array of policies also stimulated the growth of homeownership, which further increased consumer spending. Beginning in the 1980s, several developments combined to stop millions of Americans from saving altogether. Deregulation permitted the financial industry to offer massive amounts of credit on strikingly favorable terms -- even to very poor households and students. The new instruments included credit cards, home equity loans and subprime mortgages. Many Americans wondered: Why save when I can buy things with easy money?

Our savings rate, in other words, is abysmal:

The highest our savings rate has been in the last 50 years is about 11% to 12%, with an average of 7%.

Japan's average savings rate over the period was 14.2%. Western Europe, as a whole, has averaged about 10% savings since 1960. Neither are exactly posterchilds of prosperity, but the differences are stark.

Clyde Prestowitz, president of the Economic Strategy Institute, once elaborated on how policy changes influenced American consumption after the end of World War II:

15 million men and women [were] being demobilized from the armed forces all coming back looking for jobs, and the question was, "Wow where are the jobs going to come from?" And with Europe in ashes and Japan in ashes, it was obvious that an export-led drive was not likely to be successful, and so the focus was on promoting domestic consumption as a way of replacing the wartime production and providing jobs for the returning demobilized service people. And so G.I.s were given preferential assistance in getting mortgages for houses. People were able to deduct the interest on payments for consumer debt -- all kinds of measures were taken to make it easy to consume.

And in my e-book 50 Years in the Making, I wrote:

A large rise in consumer debt from the 1950s through the 1970s was met with an equal rise in income gains. Starting in the 1980s, however, household debt began climbing far faster than income growth. Households' debt-to-income ratio, which hovered near 60% in 1960, hit 80% by 1990, and ballooned to 130% by 2007.

Here's something I think about a lot: The rise in our personal savings rate from about 1% in 2005 to around 4% today walloped the economy, as consumer spending growth fell (as it has to when savings rises). What would the economy be like today if we had a savings rate of closer to 10%, as most of the rest of the developed world does? 

Fool contributor Morgan Housel has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (19) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 12, 2012, at 11:48 AM, astuber9 wrote:

    What would the economy be like today if we had a savings rate of closer to 10%, as most of the rest of the developed world does?

    That is scary to think about and I think it is possible. Another crisis in the near future could push our economy AND culture into changing how we view saving. Talk about a deflationary spiral.

  • Report this Comment On October 12, 2012, at 12:13 PM, DividendsBoom wrote:

    A beautiful thing would be to see the young increase their savings rates. Feel free to rebut me because I could not find a credible source (going off of memory from a credible source I swear), but I believe people under 35 have a negative savings rate. An increase in their savings rate would be less damaging, due to it being on a smaller income base, and the most beneficial (arguably) to the long-term health of the economy.

  • Report this Comment On October 12, 2012, at 12:19 PM, TMFMorgan wrote:

    ^ I don't have the time to fish up the report, but it's also been shown that basically all of the savings in the US is done by 20% of the population (or something like that). Most Americans save next to nothing.

  • Report this Comment On October 12, 2012, at 12:52 PM, slpmn wrote:

    ^ And the top 20% of the population makes up what percentage of national income?

    If you look at income levels of most Americans, you would see most Americans have little to save. Just an unfortunate reality.

  • Report this Comment On October 12, 2012, at 1:05 PM, DividendsBoom wrote:

    I am using savings to get me into the top 20% of income. A lot of people assume that increases in income will boost savings, but forget it can work the other way too.

    Saving has increased my investment income yes, but having a cushion emboldened my wife and I to be able to take cuts in pay in moving 2000 miles, only to be able to gain all of it back and then some in 2 years.

  • Report this Comment On October 12, 2012, at 1:07 PM, TMFMorgan wrote:

    ^ Smart comments. And congratulations.

  • Report this Comment On October 12, 2012, at 1:23 PM, DividendsBoom wrote:

    Also, I dispute that most (>50%) of Americans have little (or nothing as implied) to save. As a person living, breathing, and interacting in this country I have met these 80% that don't save, it is a personal choice. There is always something that you can forego to boost Your savings rate. My millionaire parents, that now in their pinnacle earning years are pulling in about 60,000 between them are examples of this. This, after my mother stayed home for 18 years and raised 5 children.

    Never had a nice car, never had cable, went out to eat for birthdays on even years, and that was it. Christmas we got $100 that grew to $500 over time to pick out what company we wanted to invest in.

    Obviously I had perhaps the best parents as role models you could ask for, but saving is a choice.

    Forgive the speech

  • Report this Comment On October 12, 2012, at 1:25 PM, DividendsBoom wrote:

    Thanks Morgan, I think I like you today. I was a little hostile after you snagged my "Dividends Boom" name for an article title a while back, but the hostility is slowly subsiding.

  • Report this Comment On October 12, 2012, at 1:43 PM, ryanalexanderson wrote:

    It would be interesting to correlate the savings rate with the yield on the 10-year treasury. And then to interpret the epic divergence of the two in 2009.

  • Report this Comment On October 12, 2012, at 1:59 PM, KhoolhandZ wrote:

    it is true that everyone can save... I lived in Eastern Europe for the past 7 years and I learned how to live off of almost nothing... it's simple... first of all the banks won't lend to you... and if they do it's well within your means to pay it back... and you just don't do anything that costs very much money... you walk and run and do pushups and situps instead of joining a gym... you buy fruits and vegetables and a modest amount of meat instead of chips, ice cream, chocolate bars and eating out... you drive a $1000 car instead of leasing a new one... you don't buy anything until you really need it... don't buy anything you "want"... vacation at the local lake or seaside and bring your own food and sleep in a tent... it's not the most fun lifestyle until you meet others who are likeminded... in North America I find it's these other likeminded people that are hard to find... I'm now back in Vancouver, BC and I can tell you I KNOW how to save but only because I immersed myself in a culture that saves... now I feel I have reached a happy medium with about 35% of my NET income going to savings/investments and 40% to my mortgage and the rest entertainment, food, vacations and necessities... Fool on!

  • Report this Comment On October 12, 2012, at 2:10 PM, XMFGortok wrote:

    From the tone of the article, the author suggests that somehow when people save, that money is taken out of the economy. That is not so. When I save money, the bank has more actual capital to lend out (even with our abysmal Federal Reserve system). The more I save, the more that can be lent out without having to resort to going to the discount window at the Federal Reserve (which for a myriad of reasons, has a lot of costs to it down the road).

  • Report this Comment On October 12, 2012, at 2:45 PM, astuber9 wrote:


    True saving is good for investment and banks. But it is a consumer driven economy, look what GDP did when people used their homes like ATMS. A LOT of companies suffer when consumer spending decreases.

  • Report this Comment On October 12, 2012, at 3:02 PM, Melaschasm wrote:

    While Americans do in fact have a terrible savings rate, such statistics are usually not accurate. I have not verified the data in the original post, but usually savings rate statistics exclude stock investments.

    Under normal circumstances Americans should not have a large portion of their wealth in a savings account earning less than 1%. When talking about national savings rates, stock investments should be included in the numbers.

    TMFGortok also makes a great point. Spending and savings both contribute to economic growth. Since savings do not directly show up in the GDP formula some people have incorrectly stated that savings hurts growth. Saving money does not hurt the economy, but rather it is the fear caused by a recession which causes people to save more during bad economic times.

  • Report this Comment On October 12, 2012, at 3:02 PM, TheDumbMoney2 wrote:

    TMFGortok, ah, I see what you are saying. So if we all spend no money, the economy will do terrifically!

    The fact is, when consumers increase their savings rate, during that marginal increase they are spending less money on all of the restaurants and bars and car dealerships and bookstores and grocery-stores around them. That means those business all make less money. If that means that don't add employees. And if the spending goes down too much at once those business start losing money, and then they lay off employees. And then those employees don't have money to spend at the restaruants and bars and car dealerships and grocery stores. And then it gets worse. The economy can reach an equilibrium at a higher savings rate, and do fine at that rate of savings, but it's painful getting there. It's best to think of it in calculus terms: it is the rate of change at any point on the change curve we want to measure (that's single variable calculus) and that we care about, not the absolute amount of the savings rate at any given time.

    Note the general downward trend since 1975 in the personal savings rate, but note that it tends to go up during and before recessions. That is not a coincidence. Note also a possible permanent* reversal of trend in 2008.

    Here is the actual link on the Fred website, btw, which I don't think Morgan's image provides:

    *"Permanent" may not mean permanent, may only mean a new multi-decade trend. Please consult with your doctor before using. Side-effects may include nausea, edema, and job loss. No substitutions, exchanges or refunds. "Permanent" is a registered trademark of Hopefully We're Not Hosed, Inc.

  • Report this Comment On October 12, 2012, at 3:40 PM, slpmn wrote:

    DividendsBoom - Some good points, and they're well taken. Thrift is a virtue I happen to believe in. My wife and I are natural savers, which is nice. Obviously we have lots of friends and family that are not. They could save way, way more than they do, and I think they're foolish not to.

    However, to my earlier point, consider these figures, which are from the census bureau: 40% of US households earn less than $38,520. If we're talking about a family of four, I would argue they aren't really in a position to save anything. The next 20% earn between $38,521 and $62,434. Somewhere in there, you probably reach a point where you could save something meaningful and still provide a decent living for you and your kids.

    So, if "most" means over 50%, my "most aren't in a position to save" assertion is probably not too far off the mark. Even if it's "just" 40% who don't earn enough to save, that's a heck of a lot of people.

  • Report this Comment On October 13, 2012, at 1:09 PM, ynotc wrote:

    A Foolish concept is that everything returns to the mean.

    Leveraging helped our economy in the short run eventually though,the piper must be paid and thus deleveraging is occuring and will continue to occur until debt (all debt public and private) return to more reasonable levels.

  • Report this Comment On October 13, 2012, at 3:07 PM, kyleleeh wrote:

    <<The United States emerged from World War II extraordinarily rich while other countries were rebuilding war-ravaged economies. Politicians, businessmen and labor leaders all encouraged Americans to spend to foster economic growth.>>

    This may be the same situation China finds itself in. If the US is not going to consume and at the levels it has in the past decades and EU stays a mess then China may encourage domestic consumption to make up for a drop in exports. 1.3 billion spenders would provide one hell of an economic engine for the rest of the world...including the US.

  • Report this Comment On October 13, 2012, at 4:57 PM, TMFDarwood11 wrote:

    For a time, some thought the appreciation in a home was the equivalent of savings. I argued to no avail about that.

    I knew people who thought the were smart by buying more home and watching it appreciate at a good clip. I recall on of these telling me "I made more on the appreciation of my home than I did working this year."

    My point is, I think the boom followed by the implosion in real estate did a lot more damage than many realize.

    I attribute some of the current problems people are having as they approach retirement age as directly attributable to a failure to properly distribute their investments, as well as a failure to save enough via generally acceptable methods of "saving."

    Asset allocation is something that should be applied to 100% of one's assets. Not to simply the slice they want to put into stocks and bonds.

  • Report this Comment On October 14, 2012, at 2:15 PM, xetn wrote:

    First, the US government has been encouraging citizens to consume for a very long time. We are told endlessly that consumption drives the economy. This is pure Keynesian dogma. The reason is you cannot consume anything unless and until it has been produced. Saving and investment drives capital formation which drives production.

    Second, with interest on saving at historically low rates, driven to near zero (below zero after tax) by the Fed, and, given the inflation rate that drives down the purchasing power of the currency, it would be stupid to put your money in "traditional" savings.


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