Surprise! American Savings Rate Falls

A tepid recovers has some hoping the recession is a thing of the past, but high federal debt and monetary expansion threaten future prosperity.

By Dennis Behreandt

The Bureau of Economic Analysis, a part of the Department of Commerce, reported in its March 30 release that Americans are saving less money and spending more. According to the figures for March, personal income was up by 0.2 percent while “personal consumption expenditures (PCE)” increased by 0.8 percent. This builds on the January trend that saw incomes up by 0.2 percent while PCE advanced at 0.4 percent. In other words, American spending is advancing somewhat faster than income.

This suggests that the saving rate should be down, and that is exactly what the BEA reported for March. “The personal saving rate — personal saving as a percentage of disposable income — was 3.7 percent in February, compared with 4.3 percent in January,” the BEA reported.

This is exactly what should happen given the monetary policy still being pursued by the Federal Reserve that punishes savers.

The central bank under Ben Bernanke has consistently pursued a policy of monetary expansion. The money supply charts for both M1 and M2 provided by the Fed adequately depict the rapid increase in the money supply.

M1 and M2 (Money Supply Charts)

Meanwhile, that money isn’t changing hands. Or, put another way, it’s doing little to stimulate the economy as Bernanke and the Federal Reserve believed it would.

Writing for the economics and financial news site Seeking Alpha, Erik McCurdy, senior market technician for Prometheus Market Insight has characterized the current situation as “The Smoke and Mirrors Economy.” He writes:

As we often note, the Federal Reserve can attempt to spur economic activity by introducing monetary stimuli, but it cannot force banks to increase their loan and investment activity. The velocity and multiplier data trends clearly demonstrate that the newly introduced M1 supply is simply remaining idle in places like bank reserves. Chairman Bernanke understands the dilemma, but he would prefer to deal with any problem except deflation, so he has committed to flooding the system with liquidity for the foreseeable future and worrying about the consequences later. Bernanke believes he has the tools and expertise required to prevent these unprecedented structural imbalances from engendering massive economic disruptions when they are purged from the system some years from now. However, seeing as no central bank in history has been able to accomplish that feat, we have our doubts.

While the new money in the system is doing nothing to stimulate spending, it is discouraging saving by continuing to depress the value of dollars saved. By increasing the money supply, savers who have money stored in various accounts find that those savings are not growing and perhaps are decreasing in value. Under such circumstances, why hold onto those savings? This explains the decreased savings rate.

Why would the Federal Reserve continue to push a policy that punishes American savers? Despite the rhetoric about stimulating the economy, that misses the point. The federal debt is at record high levels and inflating the money supply is the only way to handle the situation.

Jeffrey Gundlach, the CEO of DoubleLine Capital LP explained the situation at a conference held by the the Investment Management Consultants Association on April 23-25. Referencing the $15 trillion federal debt, according to Bloomberg he said, “With all of this debt building up, one thing that’s been saving us is the interest rate on the debt has been collapsing.”

Raising rates, he continued, would be “like shooting yourself in the head.”

Maybe so, but this does not ameliorate the great injustice being visited upon the American people. Irresponsible federal spending, running deficits far in advance of receipts, has created a massive debt. To pay that debt, the federal reserve is debasing the currency. Simply put, by doing that it is reaching into the pockets of Americans and stealing the value of the money in their wallets.

This can’t continue unabated. The eventual outcome will be increasing impoverishment, that is, unless the size of government is radically decreased and spending trimmed back.

It can easily be done. The president’s proposed budget [PDF] for 2013 totals $3.8 trillion in spending with receipts of $2.9 trillion (yup, that spells more debt). By comparison, in 1997 the Clinton administration budget encompassed $1.635 trillion in spending. Reducing spending to merely Clintonian excess would save over $2 trillion a year. Such “restraint” would clear out the federal debt in less than a decade without destroying the savings of the American people.

Sure, that would cramp the style of big spending politicians but it would put America back on track. Is it likely to happen? Probably not.

Therefore, the unfortunate moral of the story: spend it while you’ve got it.

Self-Educated American Associate Editor, Dennis Behreandt, is the Founder and Editor In Chief of the American Daily Herald. Mr. Behreandt has written hundreds of articles on subjects ranging from natural theology to history and from science and technology to philosophy. His research interests include the period of late antiquity in European history as well as Medieval and Renaissance history.