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    Rising household savings rate in the USA is boding

    Güven Sak, PhD16 July 2009 - Okunma Sayısı: 1164

     

    And another country heard from. Household savings of Americans reached a record high level in May 2009. While everyone was expecting them to spend more, increase domestic consumption for the American economy to grow, Americans, who have forgotten how to save in the early 1980s, stated to save. Here in Turkey, we go buying an automobile as soon as we hear of a two-day tax cut. Americans, however, sit at home and save. What is this? This is at utmost an indicator that recovery will be way to slow in the upcoming period. But what is that Americans see and we miss?

    Let us begin with figures. Rate of household savings in America in proportion to disposable income reached 6.9 percent in May 2009. Annual household savings which amounted almost $57 billion in 2007 eight folded in the January-March 2009 quarter and reached $464 billion. And as of May, amount of annual savings reached $769 billion. That is, when compared to 2007, household savings in the United States of America have grown around 14 times. Doubtlessly, it is highly tragic that a nation who has forgotten the meaning of saving almost three decades ago start saving in the middle of a global economic contraction that has not been witnessed over the last seven decades. Nonetheless, this is as understandable as it is tragic.

    Why did Americans start to save more and more? For a couple of reasons. First was the rise in asset prices. From 1980 to present; over the last three decades, prices have gone up rapidly from house prices   to stocks prices. Given that around two-thirds of Americans own a house and that stock ownership is quite prevalent among the country, you can sense the first reason for the fall in savings rate. If your wealth increases out of nowhere and even can be converted into cash, do not you feel like you are richer? Yes, you do. You feel richer even if your income flow does not change. Then, you save less. This is the first reason.

    The second reason why saving rate falls is that over the last three decades in the United States of America, new financial instruments have developed and the financial system has started to serve everyone more efficiently and at higher quantities. Democratization of the financial system has reduced the savings rate. And in face, over-democratization has eventually collapsed the system. What does a person that has easier access to consumer loans, credits cards and mortgage credits do? She borrows and consumes. That is what Americans did. And this is the second reason.

    So, why nowadays the savings rates started to increase untimely? What type of messages can be driven from this? First message is obvious: Savings rates increase just as they decreased. Wealth of the households has been seriously damaged by the crisis. Since the peak in 2007, household wealth has shrunk by around 14 trillion dollars corresponding to a 20 percent evaporation in wealth. Furthermore, we are in a period where financial markets do not and for a certain period will not operate as they used to. This is not a period where consumption opportunities can expand infinitely and equally for everyone. Democratization process in financial markets has ended. We have returned to the beginning. And this is the second factor that might lead to a fall in savings. The third factor is that an average American is now demoralized; even he did not lose his job. He does not see any light in the future. In that case, he increases savings considering he might lose income flow in the future. Fourth, in a country where unemployment rate hits 10 percent, savings rate is less likely to decrease.

    But, why the trend in Turkey is not in line with the trend in the USA? Let us put this as the fifth point. Demographic structure of the USA and Turkey is completely different. In the USA, the baby boom generation will retire very soon. So, income flows will decrease anyway. That the value of retirement savings has been decreasing only supports the rise in savings rates. When examining the rise in savings rates, fall in asset prices and the concentration in the number of people at the age of retirement should be considered simultaneously. They are more hopeless; we are younger and hopeful. They have lost everything they have and are afraid of the worse possibilities; whereas loss of wealth is not a matter of issue in the context of the USA example.

    However, the rise in savings rate shows that recovery will be less probable in the medium term. Why is this so? The main source of the expected global recovery is domestic markets. It is obvious that revitalization of financial flows and international trade will take time. It is bad that, we are talking about a period where, savings are important for the USA in addition to China. Savings are bad; they are definitely bad.

     

    This commentary was published in Referans daily on 16.07.2009

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