In the recent unpleasantness, the United States made some progress towards solving its biggest economic problem of recent years: the lack of U.S. savings. Regrettably, in the latest figures, the beginnings of economic recovery have brought backsliding, with the savings rate dropping back from 6% to 4.3%. Without more savings, as global liquidity declines, the United States will quickly become a capital-starved economy, losing investment to capital surplus countries where savings are plentiful. The difficult questions are: what caused the savings decline, and what can be done to reverse it?
During the halcyon years of the 1950s and 1960s, the U.S. savings rate – the percentage of disposable personal income that is saved – was consistently over 10%. That is nowhere near as high as the 40% savings rates consistently seen in China (though questions remain over the quality of Chinese statistics), nor the 25% to 30% of the other major East Asian economies during their takeoff phases. The United States was always a culture not particularly given to saving, and 10% is not a brilliant savings rate – it is for example lower than Germany's level even in today's culture, of a solid 11% – but it was sufficient to allow the great economic growth of the 1950s and 1960s to be financed domestically.
The U.S. savings rate began to decline during the 1970s. That was not surprising; during that decade the stock market went nowhere (declining heavily in real terms) while interest rates were steadily negative in real terms, even lower when you take account of the fact that savers had to pay tax on gains and interest income that was eaten away by inflation.
