National Savings Down But National Wealth Up Explain - Road to the Middle Class

LAST YEAR THE US savings rate was the lowest since the Great Depression, according to the Associated Press. And that was on top of the huge balance of payments deficit and the Federal government deficit.

How long can this go on? As long as you like, according to supply-side economist Alan Reynolds. That’s because even though people didn’t put more cash in the bank, national wealth went up. Writes Reynolds:

In last year’s third quarter, the Fed’s measure of household net worth amounted to $51.1 trillion -- up more than $5 trillion from a year earlier.

Even though Americans didn’t put anything in the piggy bank, national wealth went up 10 percent. And that’s the point. People save money to add to their wealth. If their wealth is already going up, because of increases in their 401(k) and the real estate market, they can meet their wealth goals without reducing consumption.

Is that a problem? Well, you tell me, senator.

By the way, household net worth “measures assets minus debts,” in case you were worried about the debt explosion.

Here’s something else that Reynolds points out.

To put one year’s $5 trillion wealth gain in perspective, personal income was just $9 trillion after taxes. Even if we had saved half of all personal income, that could not have added as much to household net worth as was, in fact, added.

Let’s put it in personal terms. If you earned $90,000 last year in salary and your home value and your 401(k) went up by $50,000, why would you be worried that you hadn’t put another $10,000 into savings?

People start to save when the economy turns south, as they should. But don’t expect the chaps at Associated Press to understand that.

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Christopher Chantrill blogs at www.roadtothemiddleclass.com. His Road to the Middle Class is forthcoming.

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