[snipped my late night rant … trust me, you weren’t reading what I was reading]So you want something that has been solved. Well, I’m not sure I believe this, but I think it might be possible …
Suppose the major problem in the economy was the erosion of the personal savings rate, which had collapsed over the last few years. The bailout crisis last September scared everyone into thinking that the next Great Depression was upon us, so everyone started to save again. You would naturally expect this to hit GDP pretty hard, but then you’d expect everything to stabilize a bit once people returned to their historic and natural rate of savings. And since we’ve returned to a more natural rate, maybe things are stabilizing.
The change in personal savings neatly (perhaps too neatly) explains the change in our economic numbers. Since we’re talking about a 5% reduction in spending, it’s not insane that this would cause a 5% increase in unemployment. (Not that there is a 1-to-1 relationship between these numbers, but it wouldn’t be surprising that they’d be closely related). The change in the savings rate also correlates neatly with the drop in GDP.
We definitely want people to be saving some money, so the return of personal savings is certainly a healthy economic development. Perhaps, then, it’s not crazy to think the economy is really getting better.
Again, I’m not sure I believe this … I worry that the Government’s policies have created more problems than we’ve solved … but the return of personal savings is certainly a good thing, and one, I might add, that was brought about with no help from the Government.
This is a fair response. The low, and even negative, savings rate was a problem. However, I would say that the cumulative effects were the real problem, not the instantaneous rate. For example, if I run up $10,000 credit card debt over a period of two years, boosting my savings rate to $100 a month is not going to suddenly fix the problem.
Americans are still in the hole. If you look at the current Financial obligation ratio (which includes money spent on rent or mortgage, debt servicing, etc. as a percent of disposable income), Americans are spending 18.5% of our take-home pay servicing our collective household debts. If you look at consumer credit, which doesn’t include mortgage debt (but does include auto loans), Americans are 2.50 trillion dollars in debt. This debt load actually decreased last quarter by 30 billion dollars, so we are making progress.
Deleveraging is a process, not an event (unless there’s a general default or jubilee). We’re going to have to keep a higher savings rate for a while before the problem of over-indebtedness is solved. In the meantime, that’s going to act as a drag on the economy.
Thanks for trying to cheer me up, though.
