Cutting Spending Leads to Growth (1 Viewer)

[Civil1z@tion]

At least that's what a number of economics papers assert.

Summary of those papers

This paper only deals with returning a country to fiscal stability in the aftermath of a crisis. It does not cover what the proper size of government is and its not even anti-Keynesian as it does argue that to a point deficit spending leads to growth. However, it does point out the following:

In a review of every major fiscal correction in the OECD since 1975, we find
that decisive budgetary adjustments that have focused on reducing
government expenditure have (i) been successful in correcting fiscal
imbalances; (ii) typically boosted growth; and (iii) resulted in significant bond
and equity market outperformance. Tax-driven fiscal adjustments, by contrast,
typically fail to correct fiscal imbalances and are damaging for growth.

So there are a few major findings. When you're deficits are getting to large you should:

a) Decisively cut current spending, gradual cuts are not as helpful and decisive cuts can actually increase economic growth.
b) Limit tax increases to the greatest extent possible as they are a major drag on growth. Austerity plans based around raising taxes are doomed to failure.
c) Cutting current government spending is most helpful, current investment spending is not nearly as useful.

So to all of you out there worried that cutting the stimulus off too soon may hamper growth, it won't as long as the current spending is cut and taxes aren't raised. This will actually improve growth.

Given this, Obama's plan to gradually return the US to fiscal solvency and indeed his increase in spending with Obamacare (which even if it does end up as budget-neutral that could be a very bad thing for growth in part of that budget neutrality is tax increases), is doing the exactly wrong thing to deal with both the recession and the US's debt.

Now some may point out that the paper is by Goldman Sachs and may attempt to use that to discredit it. However, I would like to point out that Goldman Sachs makes money by correctly predicting the results of government spending. And given how much money they make they are obviously good at it. So their incentive is to correctly predict where the economy is going to go, not to push an ideological line because if they choose ideology over truth then they are going to lose money. So you may not like Goldman Sachs and view it as greedy, but that very greed is why this analysis (which is based on the works of a number of independent economists over the years) is likely to be right.

 

[Lord Tammerlain]

I will point to the following countries

Iceland
Ireland
Lithuania
Latvia
Estonia

All have made drastic cuts to government spending, and their economies are contracting

 

[oldreliable67]

I will point to the following countries

Iceland
Ireland
Lithuania
Latvia
Estonia

All have made drastic cuts to government spending, and their economies are contracting

I'm not up to speed on Lithuania, Latvia or Estonia, but with regard to Iceland and Ireland, it is, IMO, much, much too soon to pass judgement on the success or failure of their austerity policies. It will be at least another 12 - 18 months before an informed judgement will be possible. YMMV.

 

[Lord Tammerlain]

I'm not up to speed on Lithuania, Latvia or Estonia, but with regard to Iceland and Ireland, it is, IMO, much, much too soon to pass judgement on the success or failure of their austerity policies. It will be at least another 12 - 18 months before an informed judgement will be possible. YMMV.

In the countries I listed it was not government spending that caused the turmoil within each. All of them were held up as examples of low governmental involvement in the economy, having low taxes (some flat) and being open to foreign investment. I believe that the main issue in all was too much private debt, which when the economic crisis hit, caused strong economic contractions. The economic contractions reduced government revenues leading to the deficits in all. The austerity programs will balance the budgets, and lessen the burden for future economic growth. They will not create economic growth. That will not happen untill the bad debts in all the countries is worked through, either defaulted on, or paid off. Overall untill the total debt levels of the above countries is reduced as a % of GDP growth will not occur with any strength

 

[Civil1z@tion]

I will point to the following countries

Iceland
Ireland
Lithuania
Latvia
Estonia

All have made drastic cuts to government spending, and their economies are contracting

Those where the countries which had some of the most severe contractions to begin with. The effect of cutting spending during a debt crisis is positive but not positive enough to overcome the massive GDP loss those countries face (the one with the smallest decline, Iceland, contracted by 6.6% of GDP in 2009 while the largest, Latvia, was contracting by 17.7%). Its like lighting a small fire, doing so helps keep you warm but its not going to keep away the cold at the South Pole. Countries which aren't in as harsh of contractions will probably be pushed into growth (assuming they aren't resuming growth already...though this could be the key to go from anemic growth in the face of the debt crises to solid growth).

 

[Lord Tammerlain]

Those where the countries which had some of the most severe contractions to begin with. The effect of cutting spending during a debt crisis is positive but not positive enough to overcome the massive GDP loss those countries face (the one with the smallest decline, Iceland, contracted by 6.6% of GDP in 2009 while the largest, Latvia, was contracting by 17.7%). Its like lighting a small fire, doing so helps keep you warm but its not going to keep away the cold at the South Pole. Countries which aren't in as harsh of contractions will probably be pushed into growth (assuming they aren't resuming growth already...though this could be the key to go from anemic growth in the face of the debt crises to solid growth).

Cutting spending during a contract reduces economic activity further. It will not promote economic activity untill the contraction is over, and the causes of the contraction have been worked through. Once that is done, the lack of extra govermment debt, will allow for stronger economic expansion, but from a lower base.

The article that you posted from Goldman was rather simplistic in its analysis. It ignored many various factors that Canada in the 90's experienced that helped it grow. First was the tech bubble in the US, which did occur in Canada as well. Second, an undervalued Can dollar compared to the US promoted Canadian trade with the US, which helped Canada have a trade surplus with the US and an overall trade surplus. During much of the 90's and early 2000's Canada's standard of living increased at a far lower rate then the US (various factors but primarily due to debt paydowns in Canada).

Overall the only time a country will experience immidiate economic gains (independant of other factors) from the government cutting spending is if government spending is spending money that the private sector would be spending. In the case of Ireland, Iceland, and the Baltics, that is not the case, the private sectors are contracting, and the governments are spending borrowed money which at the time of borrowing would not be used by the private sector for a good period of time

 

[Civil1z@tion]

Cutting spending during a contract reduces economic activity further. It will not promote economic activity untill the contraction is over, and the causes of the contraction have been worked through. Once that is done, the lack of extra govermment debt, will allow for stronger economic expansion, but from a lower base.

The article that you posted from Goldman was rather simplistic in its analysis. It ignored many various factors that Canada in the 90's experienced that helped it grow. First was the tech bubble in the US, which did occur in Canada as well. Second, an undervalued Can dollar compared to the US promoted Canadian trade with the US, which helped Canada have a trade surplus with the US and an overall trade surplus. During much of the 90's and early 2000's Canada's standard of living increased at a far lower rate then the US (various factors but primarily due to debt paydowns in Canada).

I'd like to note that the article covered more than just 90s Canada and this was the trend across countries and time periods the article studied. If this was just using Canada as its evidence you might have a point but you need to explain away the trend, not a single data point in it. Its like a global warming denier noting that in one year that had record heat there was an El Nino effect or something that contributed higher temperatures and from this concluding that man must not be causing global warming.

Overall the only time a country will experience immidiate economic gains (independant of other factors) from the government cutting spending is if government spending is spending money that the private sector would be spending. In the case of Ireland, Iceland, and the Baltics, that is not the case, the private sectors are contracting, and the governments are spending borrowed money which at the time of borrowing would not be used by the private sector for a good period of time

Its more than just that in this case. The article mentioned a few potential (but as yet not fully established) explanations for the data. These include:

The private sector recognizes that if the situation remains there will have to be an adjustment that will likely mean higher taxes causing them to hold back.
The negative effects on credibility of interest rate premiums
The reduction of labor costs as public sector employees enter the work force
and the greater ability of the private sector to fill the gaps from budgetary cuts if taxes are not raised.

Now the article does acknowledge Keynesianism to the point that stimulus can be helpful, but in the case of the United States for instance, we are no longer contracting and the fears about our debt are increasing. Now is the time to act not when we reach Greece level. Furthermore, the article is not in favor of cutting government spending that is based on investment, but only cutting current spending. So things like infrastructure repair can continue while we cut things like unemployment or the agriculture department.

 

[oldreliable67]

Cutting spending during a contract reduces economic activity further.

It isn't quite that clear-cut. A couple of recent papers suggest that if spending as a pct of GDP is quite high, then cutting spending during a contraction may have actual beneficial effects on the level of activity. Some of this research is touted by the "austerians" as they try to make their case. The papers that I have read thus far were pretty convincing, but nonetheless, I'm withholding judgment for now. Apologies for not having links to hand just now; will look'em up and post them later in the day when time permits.

 

[Lord Tammerlain]

It isn't quite that clear-cut. A couple of recent papers suggest that if spending as a pct of GDP is quite high, then cutting spending during a contraction may have actual beneficial effects on the level of activity. Some of this research is touted by the "austerians" as they try to make their case. The papers that I have read thus far were pretty convincing, but nonetheless, I'm withholding judgment for now. Apologies for not having links to hand just now; will look'em up and post them later in the day when time permits.

You are right it is not as clear cut as I made it out to be

The cause of the contraction would be an issue as to whether government spending cuts would lead to economic expansion. We should also discuss time frames as well. Any economic expansion resulting from cuts will not be immediately seen. But would take a period of time to occur, the cut, would most likely be felt right away, so for 6 months or so you would see a further contraction then expansion.

This would be in cases where high government expenditures, and taxes are depressing economic activity though, not in cases where levels of bad private debt are causing the contraction

 

[imagep]

...I believe that the main issue in all was too much private debt, which when the economic crisis hit, caused strong economic contractions.

So if too much private debt was the problem, then who was it that the debt was owed to? And why did there economy get to the point where the averge person was in so much debt? And how did the people who lent the money get all that money to lend?

 

[Civil1z@tion]

So if too much private debt was the problem, then who was it that the debt was owed to?

Credit card companies and banks primarily.

And why did there economy get to the point where the averge person was in so much debt?

Consumerism. People wanted more and more stuff and were willing to go into debt to get it. Easy credit lines helped enable and exacerbate this trend.

And how did the people who lent the money get all that money to lend?

Primarily from interest from previous lending. If you want the answer where they got the money to do that you have to go back to the beginnings of the banking system whereby wealthy people who had made money primarily through merchant endeavors or pillaging foreign lands (though priests making money off tithes were also often creditors on a smaller scale) lent their money to others and started the cycle. Any questions?

 

[imagep]

Credit card companies and banks primarily.

OK, makes sense to me. But dont credit card companies and banks get there money from deposits that the general public makes? Why are individuals borrowing money when they have money in the bank? I personally borrow money, but that is only because I dont have any money in the banks.

Consumerism. People wanted more and more stuff and were willing to go into debt to get it. Easy credit lines helped enable and exacerbate this trend.

That makes sense also. We all want more stuff, particularlly if the Joneses next door have it. And we built this stuff. We built our McMansions, we build our SUV's, so obviously our economy has the ability to produce this wealth. If we produced it, then why is owning it an issue? I think some people would argue that it is because we are borrowing from future production (at least that is how one poster explained debt to me), but the reality is that THIS generation produced that stuff so why can't this generation own the stuff (free of debt)?

Primarily from interest from previous lending. If you want the answer where they got the money to do that you have to go back to the beginnings of the banking system whereby wealthy people who had made money primarily through merchant endeavors or pillaging foreign lands (though priests making money off tithes were also often creditors on a smaller scale) lent their money to others and started the cycle. Any questions?

So people who somehow start out rich tend to stay rich, and people who start out not-rich tend to stay not rich because they always have to pay "rent" (interest is essentially rent on money that they borrow).

 

[Lord Tammerlain]

imagep

During the late 90s and 2000's banks were allowed to increase the amount of leverage they held by significant amounts. So instead of having $10 in reserves for every $100 they lent out, they were able to have $5 or less for every $100 they lent out depending on the credit rating of who they loaned to and what type of assets they held in reserves. They were able to create alot more loans then they were previously able to.

People, did not have to increase the amount of money held in bank accounts to allow for this extra lending, the banks in effect created extra money in the system (their own personal printing press in effect.

Banks in general are not much different then individuals, they act as herd animals just as much as many individuals, they saw the money being made by their compititors and wanted in on the action

 

[imagep]

imagep

During the late 90s and 2000's banks were allowed to increase the amount of leverage they held by significant amounts. So instead of having $10 in reserves for every $100 they lent out, they were able to have $5 or less for every $100 they lent out depending on the credit rating of who they loaned to and what type of assets they held in reserves. They were able to create alot more loans then they were previously able to.

People, did not have to increase the amount of money held in bank accounts to allow for this extra lending, the banks in effect created extra money in the system (their own personal printing press in effect.

Banks in general are not much different then individuals, they act as herd animals just as much as many individuals, they saw the money being made by their compititors and wanted in on the action

Thats something that I dont totally understand. I seem to recall that recently someone on this site was indicating that the amount of money that banks could loan exceeds the amount that is deposited with them. I am not sure that is correct, it seems quite counterintuitive. They were indicating that if somone deposited an extra $100 in the bank that if the banks reserve requirment was 10% that the bank could then loan $1,000 due to having that extra $100. If so, then where did they get the $1,000 to lend out? If they only had $100 in the bank, and they wrote someone a loan check for $1,000, then that check would bounce. I don't know much about the banking system, but I would think that it would be against the law for a bank to lend more money than it has.

My issue with this is more easily understood if you assumed this to be a new bank that had no money until someone made a $100 deposit. How could a bank with no money except for one $100 deposit lend out $1,000? Their check would bounce.

What does make sense is if someone deposited $100 and if the reserve requirement was 10%, that the bank could lend $90. The check that they give the borrower would then be covered because the bank has $100.

So if reserve requirements were lowered from 10% to 5% then certainly the bank would have more loanable money. But only a marginal amount equal to the reduction in reserve requirment - not an exponitial amount.

If I am correct about my understanding of the banking system, then adjustment to reserve amounts really couldn't explain why most Americans are broke, but yet the banks have money to loan us tens of thousands of dollars to purchase cars or hundreds of thousands of dollars to purchase houses.

Seems to me that all banks must have a few fat cat depositors who have zillions of dollars deposited. So have these rich dudes somehow gotton a hold of most of our money supply - essentially forcing the rest of of to rent money from them?

 

[imagep]

Re: Does net wealth or income indicate the productivity or merit of someone?
OK, so I just looked at Fractional-reserve banking - Wikipedia, the free encyclopedia.

Never did I see any indication that banks could loan out more money that was deposited with them. Quite the opposite, they are not allowed to loan out all of the money that is deposited with them.

I did see an explaination that banks could "create" money, but it was based upon the premise that everyone who borrowed money from a bank would deposit the full amount borrowed into a that banks bank account. Like if the bank had $100 and lent out $80 of it which was then immediately redeposited and then they could lend out 80% of that, which was then redeposited, and they could then lend out 80% of that. That may certainly happen, but it is not realistic.

Who the heck is going to borrow money from the bank just to setup a savings account and let that money sit there? And why would that person then borrow it back from the bank and then deposit it again into his savings account? At what bank would make so many loans to someone who is not purchasing something that can be used as collateral?

Typically, if I was to borrow $40k to purchase a new car, then the bank would give me a check, which I would take to the car dealer, and the car dealer would deposit it in his account. Sure, the bank may could then loan out a certain percent of that deposit, assuming that the car dealer didn't need to pay the car maker or his employees, or the electric company. Most likely, most of that $40k would be immediately withdrawn from the bank in the form of the car dealer writing checks to pay his bills, so the REALITY is that very little of the $40,000 deposited from the proceeds of the loan would remain deposited in the bank long enough for the bank to loan out 80% of the full $40k deposit.

Now lets say that I am a moron and I decide to borrow money from a bank just for the purpose of having a lot of money in my bank account and lets say that the reserve requirement is 10% and that initially I owe the bank nothing. So I borrow $100 and deposit it into my account. The bank then lends me back $90 of the $100 that I which I then deposit into my account, then the bank keeps 10% of that deposit as a reserve and I borrow the remaining $81. At that point I owe the bank $271, and I have $271 in my bank accounts. I stand exactly how I stood before I started borrowing money from the bank. And the bank stands exactly how it stood before it loaned me any money. I cant USE any of the money that I have in my bank account, because it is in my bank account. If I withdraw any of it, the bank would have to call in my loan or possibly someone elses loan because otherwise they would not have enough money in reserve. Nothing has been created.

Maybe theoritically, looking at it on a total macroecomic level, $900 has been created, but only time period in which it takes for bank transactins to clear. Whats that, about 24 hours these days? Looks to me that the concept that a bank can make a $1,000 loan out of a $100 deposit is busted. When something doesn't seem just right, it probably aint.

 

[Lord Tammerlain]

Thats something that I dont totally understand. I seem to recall that recently someone on this site was indicating that the amount of money that banks could loan exceeds the amount that is deposited with them. I am not sure that is correct, it seems quite counterintuitive. They were indicating that if somone deposited an extra $100 in the bank that if the banks reserve requirment was 10% that the bank could then loan $1,000 due to having that extra $100. If so, then where did they get the $1,000 to lend out? If they only had $100 in the bank, and they wrote someone a loan check for $1,000, then that check would bounce. I don't know much about the banking system, but I would think that it would be against the law for a bank to lend more money than it has.

My issue with this is more easily understood if you assumed this to be a new bank that had no money until someone made a $100 deposit. How could a bank with no money except for one $100 deposit lend out $1,000? Their check would bounce.

What does make sense is if someone deposited $100 and if the reserve requirement was 10%, that the bank could lend $90. The check that they give the borrower would then be covered because the bank has $100.

So if reserve requirements were lowered from 10% to 5% then certainly the bank would have more loanable money. But only a marginal amount equal to the reduction in reserve requirment - not an exponitial amount.

If I am correct about my understanding of the banking system, then adjustment to reserve amounts really couldn't explain why most Americans are broke, but yet the banks have money to loan us tens of thousands of dollars to purchase cars or hundreds of thousands of dollars to purchase houses.

Seems to me that all banks must have a few fat cat depositors who have zillions of dollars deposited. So have these rich dudes somehow gotton a hold of most of our money supply - essentially forcing the rest of of to rent money from them?

I was going to explain it myself, but Wiki states it more clearly
Fractional-reserve banking - Wikipedia, the free encyclopedia

Fractional-reserve banking is the banking practice in which banks keep only a fraction of their deposits in reserve (as cash and other highly liquid assets) and lend out the remainder, while maintaining the simultaneous obligation to redeem all these deposits upon demand.[1][2] Fractional reserve banking necessarily occurs when banks lend out any fraction of the funds received from deposit accounts, and is practiced by all modern commercial banks.

The practice of fractional reserve banking expands the money supply (cash and demand deposits) beyond what it would otherwise be. Due to the prevalence of fractional reserve banking, the broad money supply of most countries is a multiple larger than the amount of base money created by the country's central bank. That multiple (called the money multiplier) is determined by the reserve requirement or other financial ratio requirements imposed by financial regulators, and by the excess reserves kept by commercial banks.

Central banks generally mandate reserve requirements that require banks to keep a minimum fraction of their demand deposits as cash reserves. This both limits the amount of money creation that occurs in the commercial banking system, and ensures that banks have enough ready cash to meet normal demand for withdrawals. Problems can arise, however, when a large number of depositors seek withdrawal of their deposits; this can cause a bank run or, when problems are extreme and widespread, a systemic crisis. To mitigate these problems, central banks generally regulate and oversee commercial banks, act as lender of last resort to commercial banks, and also insure the deposits of the commercial banks' customers


snip

Example of deposit multiplication
The table below displays how loans are funded and how the money supply is affected. It also shows how central bank money is used to create commercial bank money from an initial deposit of $100 of central bank money. In the example, the initial deposit is lent out 10 times with a fractional-reserve rate of 20% to ultimately create $400 of commercial bank money. Each successive bank involved in this process creates new commercial bank money on a diminishing portion of the original deposit of central bank money. This is because banks only lend out a portion of the central bank money deposited, in order to fulfill reserve requirements and to ensure that they always have enough reserves on hand to meet normal transaction demands.

The process begins when an initial $100 deposit of central bank money is made into Bank A. Bank A takes 20 percent of it, or $20, and sets it aside as reserves, and then loans out the remaining 80 percent, or $80. At this point, the money supply actually totals $180, not $100, because the bank has loaned out $80 of the central bank money, kept $20 of central bank money in reserve (not part of the money supply), and substituted a newly created $100 IOU claim for the depositor that acts equivalently to and can be implicitly redeemed for central bank money (the depositor can transfer it to another account, write a check on it, demand his cash back, etc.). These claims by depositors on banks are termed demand deposits or commercial bank money and are simply recorded in a bank's accounts as a liability (specifically, an IOU to the depositor). From a depositor's perspective, commercial money is equivalent to central bank money – it is impossible to tell the two forms of money apart unless a bank run occurs (at which time everyone wants central bank money).[5]

At this point, Bank A now only has $20 of central bank money on its books. The loan recipient is holding $80 in central bank money, but he soon spends the $80. The receiver of that $80 then deposits it into Bank B. Bank B is now in the same situation as Bank A started with, except it has a deposit of $80 of central bank money instead of $100. Similar to Bank A, Bank B sets aside 20 percent of that $80, or $16, as reserves and lends out the remaining $64, increasing money supply by $64. As the process continues, more commercial bank money is created. To simplify the table, a different bank is used for each deposit. In the real world, the money a bank lends may end up in the same bank so that it then has more money to lend out.

There is a chart which show a 20% reserve requirement lending scenario as well

Generally if a bank had say $100 in reserves but wrote a check for $1000, it would borrow money from the central bank using its loans as collateral to pay for the money it did not have, or it could borrow money from other banks (see Libor on google). The main thing to recall is that most money lent out, gets put back into a bank, which the bank can then lend out

 

[imagep]

I was going to explain it myself, but Wiki states it more clearly
Fractional-reserve banking - Wikipedia, the free encyclopedia

There is a chart which show a 20% reserve requirement lending scenario as well

Generally if a bank had say $100 in reserves but wrote a check for $1000, it would borrow money from the central bank using its loans as collateral to pay for the money it did not have, or it could borrow money from other banks (see Libor on google). The main thing to recall is that most money lent out, gets put back into a bank, which the bank can then lend out

Yea, I read that article but I interpret it very different. Banks ARE NOT ALLOWED to loan more money than is deposited in them. So in that example where the bank only has $100 deposited in it, it CAN NOT lend more than the deposit minus the reserve percent.

The tables assumes that every penny lent immediately goes back into an account with the same bank without the money being spent. The fallacy is that the money never actually gets spent. If I borrow money to purchase a car and the car dealer deposits the check into his account, the money did not increase due to the banking system because the deposit that the car dealer made was from the sale of the car, not simply from the proceeds of the loan. The car dealer did not get that money because he borrowed money from the bank. And then the car dealer uses part of that money to pay his utility bill. The myth assumes that the check that utility company deposits if from the proceeds of a loan, but the reality is that the money is from the sale of the car.

Yes, money does multiply, but it multiplies not due to the banking system, it multiplies because it utilized for trade over and over again.

 

[UtahBill]

I just read in the local paper that consumerism normally accounts for 70 per cent of economic activity in the USA, but not so much now.. Also, savings rate is up. Credit use is down. Consumers are spending less, and saving more. Less money is circulating.
It may sound harsh, but maybe some of us will have to suffer a bit longer until the people who have money decide to spend it again. Maybe people, in the long run, will be better off for being forced to learn how to manage their funds better.
Certainly those who managed their funds well in past years are suffering less than those who just earn X amount and spend 1.1X, thus building a deficit of their own. IMO, easy credit is the one major contributor to the mess we are in....

 

[imagep]

Yes, money does multiply, but it multiplies not due to the banking system, it multiplies because it utilized for trade over and over again.

Let me change that. Money does not multiply AT ALL. Actually, the "fractional reserve banking system" tends to reduce the amount of money available in circulation because it requires that the banks hand on to a portion of every deposit.

Money mearly circulates. The government can increase our money supply by printing it, and it can decrease our money supply by distroying it, but aside from that, there is nothing else that affects the quantity of our money supply. What does get affected is the speed that money circulates (velocity). Velocity can be effected by government actions or by private sector actions.

So did I just discover the flaw in computerized economic modeling?

 

[imagep]

I just read in the local paper that consumerism normally accounts for 70 per cent of economic activity in the USA, but not so much now.. Also, savings rate is up. Credit use is down. Consumers are spending less, and saving more. Less money is circulating.
It may sound harsh, but maybe some of us will have to suffer a bit longer until the people who have money decide to spend it again. Maybe people, in the long run, will be better off for being forced to learn how to manage their funds better.
Certainly those who managed their funds well in past years are suffering less than those who just earn X amount and spend 1.1X, thus building a deficit of their own. IMO, easy credit is the one major contributor to the mess we are in....

It's scary, but I believe you to be correct.

 

[Civil1z@tion]

I just read in the local paper that consumerism normally accounts for 70 per cent of economic activity in the USA, but not so much now.. Also, savings rate is up. Credit use is down. Consumers are spending less, and saving more. Less money is circulating.
It may sound harsh, but maybe some of us will have to suffer a bit longer until the people who have money decide to spend it again. Maybe people, in the long run, will be better off for being forced to learn how to manage their funds better.
Certainly those who managed their funds well in past years are suffering less than those who just earn X amount and spend 1.1X, thus building a deficit of their own. IMO, easy credit is the one major contributor to the mess we are in....

A higher savings rate would be good for the US, but there are signs that consumers are picking up spending again. That's good for the short term but long term perhaps problematic. We don't need a German or Japanese savings rate (those rates are ridiculous and produce their own problems), but a 5-10% savings rate should probably be a good norm for the US.

 

[imagep]

A higher savings rate would be good for the US, but there are signs that consumers are picking up spending again. That's good for the short term but long term perhaps problematic. We don't need a German or Japanese savings rate (those rates are ridiculous and produce their own problems), but a 5-10% savings rate should probably be a good norm for the US.

Just out of curiosity, what all is included in the "savings rate"? Does that include paying down principle in loans? Like if I made $100k/yr and I was paying down principle on my home/car and business loans at the rate of $2,500 a month, but was not actually saving any cash, would that still result in a 30% savings rate?

 

[Kushinator]

Just out of curiosity, what all is included in the "savings rate"? Does that include paying down principle in loans? Like if I made $100k/yr and I was paying down principle on my home/car and business loans at the rate of $2,500 a month, but was not actually saving any cash, would that still result in a 30% savings rate?

Savings = Current Income -Current Consumption

 

[UtahBill]

Just out of curiosity, what all is included in the "savings rate"? Does that include paying down principle in loans? Like if I made $100k/yr and I was paying down principle on my home/car and business loans at the rate of $2,500 a month, but was not actually saving any cash, would that still result in a 30% savings rate?

You need some cash reserves, we all do, but paying down debt is always a good thing. A realtor once told me that I "need" a mortgage so I can get a tax break, but he doesn't understand the math. Mortgage Interest paid out gets your tax bill reduced a little, but still most of the money has disappeared into the coffers of the finance industries. I would rather pay more taxes than more interest, you get to keep more of your money in the long run...

 

[oldreliable67]

Just out of curiosity, what all is included in the "savings rate"?

In the BEA's national income and product accounts, personal income is the sum of compensation of employees, proprietors' income, rental incomes, and transfer receipts. From this is subtracted certain contributions for gov't social insurance and personal taxes, to obtain disposable personal income.

Personal savings equals disposable personal income less personal outlays, which includes personal consumption expenditures, interest payments and transfer payments. The "savings rate," is simply personal saving as a percentage of disposable personal income.

The Fed's flow of funds accounts and changes in net worth use a slightly different methodology.