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Michael Frost

Savings Rates Matter

| October 10, 2019

Savings Rates Matter.


How do you spot an economist in a room full of confused old men? The economist is the one with a calculator!

I try not to listen to all the news nowadays because you’re not sure what to believe. Lately though, economic news has been making me pull my hair out because of all the wild assumptions going on. Much of it is fake news!  I’ve been hearing a lot of nervous people saying that China is heading for a big recession and will pull the rest of Asia down with it.  Many economists on the TV shows like to say that the United States is the cleanest dirty shirt in the laundry, implying that our economy is stronger than anyone else.

Let’s look at some facts. In this newsletter, let’s just focus on savings rates. It should be considered that if a country has a strong savings rate, then theoretically there’s lots of room for the government to stimulate the economy by having some of that savings rate turn into spending.  The stronger the savings rate, then the more potential for increase spending.  The savings rate could be used to combat inflation or speed the economy up if needed. It’s an extra lever that countries without a very good savings rate don’t have.

Next, let’s get our facts from some organization that isn’t news driven.

The mission of the Organization for Economic Co-operation and Development (OECD) is to promote policies that will improve the economic and social well-being of people around the world.  They measure productivity and global flows of trade and investment. They analyze and compare data to predict future trends, like the savings rates for counties in the graphs below.

Saving is the difference between disposable income plus the change in net equity of households in pension funds and final consumption expenditure. Saving therefore reflects the residual income used to acquire financial and non-financial assets. It’s important to note that disposable income does not include any capital gains or indeed losses, and so neither does saving. Net saving is equal to saving less depreciation. This indicator is measured as percentage of gross domestic product (GDP). All OECD countries compile their data according to the 2008 System of National Accounts (SNA).

In the definition above, the savings rate also includes money going into the total savings picture. For instance, it includes money going into Social Security and into pension funds as well. Currently, the United States saves about 4%.  China is well over 40%. 


We could look at that another way and see where the savings is worldwide.  The World Bank did this graph below.



This is just to show that many other countries have much more flexibility than the United States. Especially when it comes to dealing with the next recession or slow down.  I don’t understand why many economists who get on these news shows don’t point this out.  I would make people think in a different way.

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