Wednesday, August 31, 2005

U.S. Savings Rate at 0%

According to a recent U.S. government report, the national savings rate is now 0%. Though it seems incredible, it's true. The last time the annual rate was this low was 1934 — during the Great Depression.

The savings rate was nearly 5 percent as recently as 1994, and double-digit savings rates were customary 25 years ago.

The question is, where did all the savings go? The answer: home purchases.

According to the Federal Reserve, the rise in home values has given the average U.S. household a net worth of more than $400,000. Household real estate assets have risen by just over two-thirds since 1999. So, Americans now view their homes almost like ATM machines, using home equity loans and refinancing to pull out cash and support their spending.

In our materialistic, consumer driven society, people are actually spending more money than they make. Every time there is a marginal uptick in incomes, there is a commensurate, or greater, increase in spending. This is the height of irresponsibility, yet it's been the engine for a growing U.S. economy.

Americans need to keep spending at this frenzied pace to maintain the economy. Experts say that if everyone were to start saving, the economy would slow considerably — potentially to the point of recession. This is an obvious problem.

Yet, the savings rate will be driven down even further when the Baby Boomers start retiring and drawing down on retirement savings. The nation will need greater savings to fund the onslaught.

One of the factors driving down the savings rate is rising energy costs. If not for that factor, it is estimated that savings would still be closer to the 2 - 2.5 % rate of two years ago, when energy prices were lower.

Yet, with rising world demand, coupled with the production, refining and shipping problems associated with Hurricane Katrina, the problem will likely worsen.

Copyright © 2005 The Independent Report. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed without the author's consent.


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