When a Vice Becomes a Virtue - Is The U.S. Saving Too Little?

Low saving rate in the US has kept the weak global economy afloat by putting foreign capital to more productive use.

Recently, the personal saving rate in the U. S. turned negative for the first time since the Great Depression. A negative personal saving rate means that the household sector as a whole has spent on consumption more than its disposable income (i.e., after-tax income¹). This has raised an alarm over unsustainable spending.

A negative personal saving rate, however, does not mean the national saving rate is negative. Thanks to government budget surplus and a positive saving rate in the business sector, national saving rate is currently at a healthy 17% of national income, up from 14.4% in 1993 (BW, 12/28/98).

The whole point of saving part of the after-tax income is, of course, to build up the household sector's wealth. A negative personal saving rate inevitably means that some households have been rapidly building up debt to finance their spending. Indeed, the average household now has debt equal to its annual disposable income. Even when home mortgages are excluded, household debt is still more than a fifth of income, a record figure. But, household assets have increased even faster, raising household net worth (assets minus debt) from 5 to 6 times disposable income (FT, 12/14/98). Thus, even though the spending rate out of after-tax income has increased and the saving rate has decreased, consumer spending as a share of consumer net worth has declined sharply from 60% in 1990 to only slightly more than 30% now (WSJ, 12/21/98). Clearly, part of the higher spending has been motivated by the so-called wealth effect².

Low saving is usually considered bad because not enough currently produced goods and services are devoted to investing in newly produced capital goods that would increase future income. But, as long as domestic saving is supplemented by an inflow of foreign saving, there should not be any shortage of investable funds. Indeed, foreign capital has allowed the U.S. to invest more than it saved. The inflow of foreign saving has raised the U.S. investment rate by financing a high-tech investment boom and investing directly in green-field business operations.

Foreign capital has also partly fueled a stock market boom that boosted household net worth with capital gains. The wealth effect, in turn, increases spending on goods and services some of which are imports. Thus, by spending (in the form of consumption and investment) more than it produced nationally, the U.S. has developed both the need for foreign capital and the means with which foreign countries can lend to us. So, if the U.S. had not sustained a persistent and deepening current account deficit by having sold fewer goods and services to and earned less from her investment in foreign countries than they do us, foreign countries would not have the current account surplus to supply investable fund to supplement her inadequate saving.

Failure to generate enough domestic saving to fund domestic investment is normally not a blessing as borrowing from foreign saving adds to a nation's foreign debt. But, if the rates of investment return in the U.S. are higher than those in foreign countries and foreign countries desperately need additional demand for their otherwise unsalable goods and services, high spending and low saving in the U.S. serve to keep depressed foreign economies afloat. The Asian financial crisis and the its contagion effects on non-Asian economies have provided exactly such an environment for U.S. consumers to indulge in a spending binge.