This is an old WSJ graphic but it's still interesting and worth discussing, as it depicts the historical savings rate going back to the early 80s:

 

Graphic courtesy of the WSJ

 

So one of the constant refrain during this downturn has been that "we need to get people spending again", in spite of the fact that a lot of consumers are overleveraged and aren't saving enough. The basic idea being that in order for the economy to grow people need to "spend like it's "2006 ". It goes back to the theory of "the paradox of thrift", which puts forth the idea that while saving may be good for individuals it's not good for the economy overall.

 

However when we look at the historical savings rate we see that people can save a lot more than they do now and the economy can still be strong. This suggests that what we really need is to reduce unemployment and get more people spending, as opposed to getting people to spend more at an individual level. The solution is increasing the number of participants in the economy, as opposed to the majority of individuals spending all of their disposable income.

 

Unfortunately becoming a nation of savers is easier said then done because our economy is (for all intents and purposes) structured in a way that it depends on us being a nation of wild spenders as opposed to rational savers. Several industries ranging from automotive, real estate, retail, etc, have been generating their growth over the last 20+ years from people overspending, as opposed to spending within their means.

 

The adjustment won't be easy, but it's a necessary part of creating a sustainable economy, as an economy based on being a nation of spenders isn't sustainable.

 

IF the Obama administration really wants to stimulate the economy in a sustainable fashion, they really need to put some thought around how to incent savings and other smart financial decisions. As opposed to the usual pattern of trying to incent people to spend money.

 

The graphic comes from a WSJ article that discusses the potential for the beginning of a trend where the savings rate continues to increase even after the economy recovers, which you can read in full here.

 

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.