Personal Savings Rate

Big Al at the Y brought up a good question a couple of days ago about savings. This blog entry is dedicated to him.



Big Al asked me what my personal savings rate was. My wife and I are lucky to be in the situation we are in and save nearly 1/3 of our disposable income. That will change when we buy a new home, but for the moment we are lucky.

Savings is important because it is channeled into investment through financial institutions. A low rate of savings means capital inflows from foreign investors and a negative net export number in the current account. As you can see from the graph, the personal savings rate is actually increasing.

One reason why the rate is increasing is consumer confidence. Consumers are fearful of the economic road ahead so they are saving. This means that consumption must be decreasing so consumers are spending less. Consumption makes up about 67% of GDP so an increase in personal savings could mean lumpy times for the economy.

Another reason why personal savings is increasing is the stock market. When the market is increasing, people feel wealthy and spend. With the market depressed, people are looking for safe ways to increase their wealth.

If you are a teacher of AP economics, here's a thought. An increase in savings would shift the supply curve to the right in the loanable funds market. This shift would lower the real interest rate and make it more profitable for business to invest. Is this what you are observing?