It used to be that Americans saved too little, and this was dangerous. Now Americans are saving more, and that is dangerous too. Can’t win for losing. WSJ:

U.S. household debt, which has been growing steadily since the Federal Reserve began tracking it in 1952, declined for the first time in the third quarter of 2008. In the same quarter, U.S. consumer spending growth declined for the first time in 17 years.

That has resulted in a rise in the personal saving rate, which the government calculates as the difference between earnings and expenditures. In recent years, as Americans spent more than they earned, the personal saving rate dipped below zero. Economists now expect the rate to rebound to 3% to 5%, or even higher, in 2009, among the sharpest reversals since World War II. Goldman Sachs last week predicted the 2009 saving rate could be as high as 6% to 10%…

frugality is good for individuals and for the economy. Savings serve as a reservoir of capital that can be used to finance investment, which helps raise a nation’s standard of living. But in a recession, increased saving — or its flip side, decreased spending — can exacerbate the economy’s woes. It’s what economists call the “paradox of thrift.”

So far, we’re in the camp that believes that the quick decline in housing and consumer durables like automobiles is a rational response to the loss of wealth among US consumers, and should bottom out fairly quickly. However, the swift change of behavior towards savings in the US raises other interesting questions. In recent years, China’s savings rate has been about 50%. So will the Chinese start spending more as Americans start saving more?

The answer from CIC, China’s year old investment company, is possibly: “Chinese companies may respond to the government’s call to pour more money into the domestic economy. Central Huijin Investment Co., a CIC unit, began late last year to increase its stakes in major banks such as Bank of China Ltd., China Construction Bank Corp. and Industrial & Commercial Bank of China Ltd.” The idea would appear to be to support continued lending by these entities to support domestic demand. We continue to be skeptical that such measures will enable China to avoid a hard landing. The problems of the US have much easier fixes (after the problem of systemic financial risk has been solved) than the problems of vast overinvestment in production capacity in developing countries like China.

This entry was posted on Wednesday, January 7th, 2009 at 2:57 am and is filed under business, China, General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.