Savings has to be a good thing, right? Moms have told their kids for generations to "get an education, get a good job, save some money, get married and give me some grandchildren." The timeless advice from moms is usually reliable in the big picture of things, but sometimes a little simplistic, so let's go a bit deeper.
First, what is the savings rate? For a nation, or a family for that matter, the savings rate is the money earned minus the amount spent on consumption. The amount left over – the savings, can then be used to invest, pay down debt, or to literally be stashed in a non-productive environment like the mattress.
From the 1950s to the 1980s the U.S. savings rate ran between 8 to 10 percent. Then a long-term decline began, which took the rate down to about zero in the mid-2000s. The financial crisis and real estate bust in 2007-2009 woke us up a bit and the savings rate has climbed back to around the 5 to 6 percent level. Here's a chart illustrating that history
Compared to many developed countries, we have a dismally low savings rate. Part of that is due to the way our calculation is made. We spend a larger percentage on education and research and development than any other country. These expenditures are an investment in the future, but they are not counted as investment in the savings rate calculation. But, even if the rate reported is artificially low, we are still not as good at saving as many of the other nations are.
A high savings rate by itself is not necessarily a positive. Japan has had one of the highest savings rates for several decades and their economy has now spent the better part of 20 years in a stagnant or recessionary economy. The reason is (at least partially) that their savings is effectively "in the mattress." Perhaps not literally, but when savings sets in an account earning zero, it is not building wealth for the owner, not being deployed to create new jobs or innovation, resulting in a very stagnant economic environment.
So, while savings is a hugely important factor for the on-going success of an economic system, the savings need to be deployed in a way that helps nurture future economic activity aand helps enhance the wealth of the owner of the savings. Investment in a system with free and open financial markets allows for companies to borrow or issue stock, develop their businesses, and by extension, create jobs.
As with most things in life, balance is a good thing. An adequate savings rate with that savings deployed efficiently to support economic activity is a great goal. Saving at the maximum rate just for the sake of savings but not deploying the capital effectively is not a goal that will support a nation's future prospects.
Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit www.breitercapital.com.