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Tags: finance, personal finance, savings are doing more harm than good
 I had the occasion to stay over my friend Edward’s home one weekend since his place was quite a ways from mine, it was getting late, the weather wasn’t exactly cooperating, and I didn’t feel like driving. I had asked for a razor since obviously I didn’t bring any and with a sheepish grin Edward tossed me a pack of disposable razors that he bought from the local dollar store.
While he didn’t say anything else I pretty much understood the implications in light of what has been happening in our economy lately. For the most part, we Americans are cutting back on our consumption and spending and are putting more in savings. A Harris Online survey between May 11th and May 18th this year showed that about 2/3 of Americans are spending less overall with about 1/3 saying that they are cutting back on credit card usage.
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At the same time about 20% of those with personal savings and about 10% of those with retirement savings have added bank savings and CD’s to their portfolios. In fact, according to Washington, the savings rate rose to 6.9 percent in May, the highest level in more than 15 years, and that’s up from 5.6 percent just this past April.
The savings increase is good news right? While one would think so, it just may be that savings are doing more harm than good, at least in our short term economic outlook. Now don’t get me wrong, I agree that putting money aside is good for us in the long term, but for the short term, it’s another thing altogether.
John Lonski, chief economist of Wachovia Corp has said that while the government has done its job of adding stimulus to the economy in the short run it remains to be seen if it is having the desired multiplier effect. There has been a ripple effect but it has been the devastating kind.
The economy has been shrinking since last year because no money was being used since the money that was saved does not circulate through the economy thus translating into fewer sales and lower revenue for struggling businesses. The result of the cut in consumer spending has been the closing of hundreds of stores by retailers such as Sharper Image and Foot Locker.
And because consumers like you and me are thinking of driving their vehicles an extra year instead of replacing them with newer ones, the Big 3 car makers—Ford, GM, and Chrysler, along with their respective dealers and suppliers—are getting hurt resulting in massive lay-offs and closings, to the point where they are getting billions of dollars of tax payer’s money to bail them out.
Why such a result? Let’s put it this way, consumer spending accounts for a little under three fourths of our country’s economy, so when it when it snaps, the economy bears the full brunt of it. It comes down to numbers—even a one percent increase in savings results in billions in deferred spending, and that’s no small potatoes.
What this means is that since consumer demand is low, business expansion is also slower—and it’s not on a one to one basis either. And that’s why the way I see it, this is a paradox—we need to save more and yet on the other hand we also need to spend more in order for our economy to recover since no recovery can effectively take place without consumer spending.
This is what happened to Japan in the 90s during their own economic depression period. Despite the billions that was being pumped into the country by the Japanese government, the already thrifty Japanese people merely put it all away instead of spending it. It seems that we are now in more ways than one following in their footsteps.
If this continues, it may take a while before our economy fully recovers.
About the author
The author of this article Rick Goldfeller is a successful underground Financial Analyst who has been advising and coaching individuals for many years. Rick recently published a book on how to manage your money and attract Wealth and Financial Freedom. More info on his Finance Planning course is available HERE.
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