May 1, 2016
Macroeconomists define saving as Income Less Consumption and Taxes. There are two distinctions – public, or government savings, and private, or household, savings.
From 1986 to 2000 inclusive, a 15 year period, gross private savings grew 78%. In the same length of time, from 2001 to 2015, it grew 112%. So why the higher savings rate?
Lower interest and inflation rates have persisted during this later period. One would think that consumers would be more likely to save when interest rates were higher in the earlier period. However, the reverse is true. Households respond to lower interest rates by saving even more. Why? Because their savings will grow more slowly at lower interest rates, they must save more, which only keeps interest rates low. Like so much of human activity, the process is self-reinforcing.
What else contributes to higher savings rates? 80 million Baby Boomers is more than a third of the population. As they neared retirement age, they saved more of their income. In 2012, the first boomers turned 66, a high point in the chart of savings below.
Richard Koo is the chief economist at Nomura, a gigantic Japanese financial holding company similar to Goldman Sachs. He introduced the idea of a balance sheet recession instigated by a large number of people and businesses paying down their debts to repair their balance sheets. Here is a recent paper.
Because trends in savings are affected by the decisions of mutiple generations, the primary causes can be difficult to establish. As the Boomers begin to spend down their savings in retirement, the equally large Millennial generation will start saving but it is unlikely that they will completely offset the spending rate of the Boomers. The glut of savings will be slowly draw down until new investment puts enough demand for savings, which will spur interest rates higher.
Cadillac Purchasing Power
Last week, I looked at the relative purchasing power to buy a Ford F-150 pickup. In a trip to a car museum lately, I learned that a new 4 door Cadillac model cost $2000 in 1913. The average hourly wage was $2 per hour per the NBER, so it took the average person 1000 work hours, about half a year, to buy that Cadillac. A 2016 Cadillac 4 door ATS Sedan costs about $40,000, an amount that would take 1573 hours, about nine months, at an average $25.43 per hour (BLS).