Why I’m Betting the High Personal Savings Rate Will Fall

Currently some people are all excited about the personal savings rate in America. They feel it shows that people are becoming more frugal and prudent in the way they handle their money. The last reported personal savings rate as I write this was 6.9% in May, 2009. And that’s great, but it is not the mark of a fundamental way in which we approach our money but is an emotional reaction to the bad economic news that crosses our kitchen table or television today.

Historical Personal Savings Rate 1959 to 2009
Why I’m Betting the High Personal Savings Rate Will Fall
Data: U.S. Department of Commerce


I am certainly not trying to say that the sky is falling and that we all need to run for cover. My point is that I do not believe that the current spike in the personal savings rate is a mark that as consuming Americans that we have changed our outlook on consumption in our core. My bet is that within one year of a common belief that these difficult economic times are over that the personal savings rate will fall to 60% of the peak amount in this economic downturn.

Let’s look at what I see on the horizon. The withdrawal of the American consumer is not what any democratic or republican government wants. Government knows that this is an economy based on consumption and that consumption is the desired goal and that consumers must get back to borrowing and buying as quickly as possible. Hence, why we call people, consumers. Efforts and measures have been and are going to be put in place to draw consumers back to the table of consumption. It is the goal. Without that the economy of the United States will not improve. Without that, jobs will not be created and unemployment reduced. It is the end game.

These sad and sanguine times of the current economic recession will unleash a buying spree from within the American public once a few things happen. All which will.

  1. Consumer confidence must rise to higher levels.
  2. Unemployment rate must show that it is steadily dropping.
  3. Banks must stop running for cover.
  4. Credit will loosen again.
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The average American consumer is still stuck in the demand for the new things, the joy experienced by purchase, and the quest to nullify other concerns with shopping. The purchase of more and bigger items will resume once the above goals are met. Once that happens, more disposable income will be consumed with consumption and not available to save.

While some may learn a lesson from the current economic conditions, I seriously doubt that frugality will become the new black. Instead, I think that what the current conditions are creating is an increasing pressure to consume once the conditions are made right again, which they will be. Otherwise, the assumption must be that both consumers and lenders have learned some fundamental lesson from current events and that would be incorrect.

Credit will become easier to get again because banks compete with volume, not quality. Once the markets open up again for banks to sell packages of loans the flood gates will open. It will be an all out race.


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See also  Majority of People You Know Are Living Paycheck-to-Paycheck

3 thoughts on “Why I’m Betting the High Personal Savings Rate Will Fall”

  1. I am going to have to side with the weakonomist. I pulled apart the data by decade and we had a volatile roller-coaster in this last one. Although the range of savings rates in comparative to the 80’s, the rate peaked at 12.5 then and we are peaking now. While I believe we will stabilize, I don’t think that the unsure feelings of this downturn created will fade away. We have many people underemployed, unemployed and simply bewildered. I think that many will learn that the only true way maintain a successful relationship with their earnings will be to diligently commit a portion to an emergency fund. If there is any lesson to be learned here it is Murphy’s Law — left to themselves, things tend to go from bad to worse.

  2. This is an easy bet to make because you aren’t saying when. Of course at some point it will go down, but when?

    If you’re thinking is in the next decade you’re misunderstanding what the PSR means. It’s been so low because so much of consumption over the last decade was financed on credit. This credit is no longer available because our sense of wealth came from pulling equity out of our homes. This equity is gone and not returning any time soon.

    I’m not one to play the “whole new paradigm” game but for the next half-generation the savings rate will not be like we saw in the 2000s.
    .-= the weakonomist´s last blog ..Weakonomics Tour Of The Country: South Carolina =-.

    • I think I’ll bet on the side of hyperbolic discounting and behavioral economics. As soon as credit is available again my belief is that people will once again replace more prudent benefit from saving with more immediate pleasure from consumption.

      I’m betting that the American consumer will be drawn more towards satisfying pent up gratification through consumption rather than achieving satisfaction through self-control once the confidence improves and credit is looser again.

      I’d give you a specific date but I have no way of knowing if we’ve reached the peak of this down cycle yet.



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