Saving money is good for individuals but bad for the economy as a whole. That is the “paradox of thrift” mentioned everywhere from the Bible (Proverbs 11:24) to Keynes’ economic theories still in use today. Modern developed economies have gotten around some of the problem by insuring bank deposits and developing money markets, at least ensuring that “savings” circulate back into the system. Cash and gold, both still popular savings options, are two exceptions of course.
That makes a nation’s savings rate something to watch; here is the historical BEA data for the United States back to 1959:
And here is what we see in that data:
- From 1959 to 2007, US savings rates broadly followed interest rates.
- During the period when rates rose (1959 – 1981) so did the percentage of consumer’s disposable income that went into savings (i.e. not spent).
- When rates declined (1982 – 2007), savings rates fell. From the 10% – 15% of disposable income saved during the period of rising rates, the savings rate fell to a trough of 2.2% in mid 2005.
- The Great Recession-and-after period (2008 – present) breaks the connection between interest rates and savings. Savings rates have generally risen, and now stand at 8.3% – the same level as the late 1980s when 2-year Treasuries yielded over 5% rather than today’s 1.6%.
Takeaway: American savings rates are structurally higher right now than at any point since the early 1990s, and it’s not because interest rates are better (the old relationship) but likely due to a variety of new factors:
- An aging population, with a higher propensity to save rather than spend.
- A younger generation (millennials) that despite their reputation are actually saving what they can and deferring consumption.
- Broad concern about the state of the US economy being late in the current cycle.
- While overall savings rates may be higher, the aggregate data may simply reflect incremental propensity to save among higher income households.
US retail money market fund balances support that final point – that much of the boost to savings rates post-Crisis originates from the balance sheets of wealthier households:
The increase in MMF balances over the last 3 years totals $353 billion, a 55% increase. That is a much greater increase than what we see in US commercial bank savings account deposits, which are only 11% higher over the same period. To the degree that this crude comparison captures general savings (banks) versus that of wealthier, more financially savvy individuals (MMFs), it does help explain why US savings rates are on an upswing.
Finally, let’s compare the US data to that of Europe:
- Current US personal savings rate: 8.3%
- Q2 2019 Eurozone savings rate (latest available): 13.2%
- Eurozone savings rates have risen from their post-Great Recession lows of 12.0% in Q1 2018 to their present levels.
Pulling all this into 3 final points:
- The historical linkage between interest rates and personal savings rates no longer works in either the US or Europe. In both cases, low or even negative rates are not increasing marginal spending. In fact, savings rates are rising.
- In the US, higher savings rates seem concentrated in higher income households. Overall savings are rising, but not at the pace indicated by the aggregate data.
- On the plus side, higher savings rates may support consumer spending in the next downturn as well as mitigate credit losses (good for banks, for example). On the downside, higher levels of savings limits economic growth (the paradox of thrift).
Bottom line: “this time is different” may be the kiss of death to any economic observation, but personal savings rates in the US and Europe clearly fit that description.
Savings Deposits at US Commercial Banks: https://fred.stlouisfed.org/series/SVGCBSL