Monday, September 1, 2014

Savings And The Role It Plays In The Economy

Balance is important and like so many things in life when it comes to economic policy it is very important to balance the markets reward when it comes to savings and debt. Savings plays an important role in the economy  and has been shortchanged, this will come back to haunt us. Traits such as thrift, being frugal, and living within our means has not been given due credit, living by increasing debt is far too acceptable. When we find it necessary to discuss savings we are back to basics and it is a sign we have strayed far off course in our economic policy.
Many People Forget That Small Amounts Add Up

Savings really has two meanings it can refer to the increase in ones assets and their net worth or the money people place in accounts for a rainy day and future use. While the distinction seems small it is as important as is the motivation and intended future use of this money. The form in which we chose to hold this wealth also has an effect on economic growth. In recent years Fed policy and low interest rates have caused many savers to shift their assets into higher risk assets in search of higher yields.

The basic economic theory many of us were taught as children was laden with the virtues of saving. As children the concept of putting money away for a rainy day and delaying gratification was pounded into our heads, it was heralded as a good thing.  By making a habit of spending less than you make you could put a portion away on a regular schedule and before long you would have a nice little nest egg. To put icing on the cake when this money was put into a safe place like a bank account you would receive interest on your money and the account would grow faster and ever larger.

The idea that compounded interest was a powerful force and the picture of interest upon interest upon interest was put in our minds. This might explain why the fear an ever growing national debt looms large upon those of us who internalized this concept. The banks and financial institutions in which we place our money loans it out to those willing to pay a higher rate of interest. This money flows back into the economy for investment thus creating jobs. A key factor often overlooked is that society benefits when people save as government does not need to spend tax dollars to support individuals who have financial setbacks. Even a small savings account tends to insulate people from minor economic shocks that can send a persons world spiraling out of control.

The concept that saving is important has been thrown under the bus. If the markets, government, and society fails to reward people for saving it will not happen. In our world of instant gratification many people have dropped or never developed the habit of saving because it often requires a great deal of discipline. Instead of being rewarded for doing the right thing in our current system savers are punished by being required to show interest on savings as income that is then taxed. It would be wise for our "do nothing Congress" to reform taxes in a way that adds incentives for people to save such as passing a bill excluding the first two hundred dollars of interest from a savings account.

For years economist pointed to the high savings rate of several countries as a source of their economic growth and health. Japan and China rated high in this category. Much of the savings in Japan flowed into government bonds allowing the government to spend freely and still have the luxury of controlling its own fate. In China the money often was used for investment allowing the country to rapidly expand its production capacity.  The benefits flowing to a nation that saves cannot be overestimated, but today our culture is all about consuming and spending. Even Presidents have asked Americans to go out and spend to stimulate the economy.

To make saving a reasonable and rewarding act, Fed policy must be set so savers enjoy a fair return after factoring in inflation. People with savings have the ability to pay debts and obligations in a timely fashion and can avoid costly late charges and fees. This allows them to stretch their money and make better use of it. Not only should Congress reform taxes in a way to spur savings by excluding the first two hundred dollars of interest from a savings account they should go farther and match it with a tax credit. Saving was once seen as a virtue with sayings like "a penny saved is a penny earned", but not so much anymore. In some respects saving seems like the penny to have lost much of its value.

Footnote;  This post dovetails with many of my recent writings. Other related articles may be found in my blog archive, thanks for reading, your comments are encouraged. Below are two articles written a while back one about the often misunderstood subject of debt and why it is risky to loan money, the other delves into how a failed business start-up can devastate a persons savings.

Foot note #2;   Another post you might find interesting delves into how the economic efficiency of credit is beginning to collapse, see below.


  1. Bruce:
    This article seems like an old-fashioned article we would see when interest on savings was 4%, and the stock markets went up and down.
    How can the time value of money be zero?
    We have had interest figured in savings and loans since old-time Biblical days.
    We are trying to reinvent the wheel, but all we are getting is a flat tire.
    Don Levit

  2. I have to agree that this doesn't work. Sadly the clowns in control have not come up with anything of promise. If the balance between debt and savings is not restored soon our current system will fail!

  3. Very qwell Written!Savings plays an important role in the economy and has been shortchanged & this will come back to haunt us. The idea of being great full.

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