A pair of conflicting headline stories caught my eye. One headline says Americans have too little savings while the other says we are saving so much that it's a problem. Let's have a look.
Most Americans Have Too Little Savings
MarketWatch reports Most Americans Have Less Than $1,000 in Savings.
Americans are living right on the edge -- at least when it comes to financial planning.
Approximately 62% of Americans have less than $1,000 in their savings accounts and 21% don't even have a savings account, according to a new survey of more than 5,000 adults conducted this month by Google Consumer Survey for personal finance website GOBankingRates.com. "It's worrisome that such a large percentage of Americans have so little set aside in a savings account," says Cameron Huddleston, a personal finance analyst for the site. "They likely don't have cash reserves to cover an emergency and will have to rely on credit, friends and family, or even their retirement accounts to cover unexpected expenses."
Why Have a Savings Account at All?
I have a question: Why have a savings account at all? Interest is roughly 0% so it effectively makes no difference whether money earns nothing in a "savings" account rather than nothing in a checking account, or nothing in a money market account.
That said, I agree with the overall message: people are not saving enough. Here's a better way of stating the problem, also from the article.
A similar survey of 1,000 adults carried out earlier this year by personal finance site Bankrate.com, which also found that 62% of Americans have no emergency savings for things such as a $1,000 emergency room visit or a $500 car repair. Faced with an emergency, they say they would raise the money by reducing spending elsewhere (26%), borrowing from family and/or friends (16%) or using credit cards (12%). And among those who had savings prior to 2008, 57% said they'd used some or all of their savings in the Great Recession, according to a U.S. Federal Reserve survey of over 4,000 adults released last year. Of course, paltry savings-account rates don't encourage people to save either.
This is entirely believable. The next headline is pure nonsense.
People Saving Too Much is Now a Problem
Myles Udland writing for Yahoo!Finance reports People weren't supposed to be saving this much money -- and now it's a problem
Too much saving means not enough spending means a lack of aggregate demand in the economy, the thinking goes. "Secular stagnation" is another term that might apply.
In a note to clients last week, Deutsche Bank's Binky Chadha looked at the relationship between interest rates and savings rates, finding that -- of course -- consumers aren't exactly acting the way the economists at the Federal Reserve might expect.
Namely, people are saving money despite low interest rates when many economists expected or hoped these folks would spend that money to buy stuff or put it in assets that actually earn some return.
For starters, it should be perfectly obvious that the first article is far closer to the truth: people are simply not saving enough. Secondly, the idea people can save too much is a Keynesian fallacy.
Frank Shostak offers this lesson in Is Saving Bad for the Economy?
Contrary to popular thinking, saving doesn't weaken aggregate spending; on the contrary, it reinforces it. On this, Henry Hazlitt, in his "Economics in One Lesson," wrote:
"When money is saved and then invested it is used to buy or build capital goods. Any of these projects puts as much money into circulation and gives as much employment as the same amount of money spent directly on consumption. Saving in short in the modern world, is only another form of spending."
According to Mises, "Production of goods ready for consumption requires the use of capital goods, that is, of tools and of half-finished material. Capital comes into existence by saving, i.e., temporary abstention from consumption."
Since saving enables the production of capital goods, saving is obviously at the heart of the economic growth that raises people's living standards. On this Mises wrote, "Saving and the resulting accumulation of capital goods are at the beginning of every attempt to improve the material condition of man; they are the foundation of human civilization."
When money is printed--that is, created "out of thin air" by the central bank--it sets in motion an exchange of nothing for money and then money for something. An exchange of nothing for something amounts to consumption that is not supported by production.
Because every activity has to be funded, it follows that an increase in consumption that is not supported by production must divert funding from wealth-generating activities. This, in turn, diminishes the flow of real savings to the producers of wealth, which weakens the flow of production, which sets in motion an economic recession.
Observe that what has weakened the demand for goods is not a sudden capricious behavior of consumers, but the monetary injections of the central bank. In short, every dollar that was created "out of thin air" amounts to a corresponding dissaving by that amount.
So long as the real pool of savings is expanding, the central bank and government officials can give the impression that loose monetary and fiscal policies drive the economy. This illusion is shattered once the pool becomes stagnant or starts declining.
Mises wrote, "Without saving and successful endeavours to use the accumulated savings wisely, there cannot be any question of a standard of living worthy of the qualification human."
This sheds light on current events in Japan, where the high savings rate that has ranged between 15 percent and 20 percent is blamed for the economic slump. What is happening in Japan is not the result of "too much saving," as suggested by many experts, but rather of too many loose fiscal and monetary policies that continue to destroy households' savings. The misguided policy of lowering interest rates to almost nil is a major catalyst behind the destruction of real savings.
There is no such thing as lack of aggregate demand. Rather, central bank sponsored boom-bust cycles and inflationary policies create so much malinvestment, dissaving, and income inequality that misguided economists mistake money sloshing around for "savings".
The proper way to view savings is production minus consumption. To have savings, one must first produce something. Thus, printing money (borrowing it into existence) does not constitute real savings.