March 2, 2009

Savings rates are rising.

Mark Perry at Carpe Diem, whose blog I follow and enjoy, posted something observational today about American savings rates in January rising to a 14 year high of 5%. Without any empirical evidence to back up my claim, I'd like to suggest that savings rates are likely a lagging economic indicator. Probably more so than even the unemployment rate.

But then again there's this view of GDP versus Savings;

Which doesn't show a connection between the two. Other possibly, than the fact that growth could be driven by spending. No surprise there. But given that GDP has dropped into negative territory the psychological effect can drive savings up. That in turn can drive GDP further down. A deeper look is needed at the correlation between savings both going into a recessionary cycle and coming out of the recessionary cycle. If the savings rate lags then trying to stimulate demand will have a slow effect on trying to stimulate growth and a market recovery.

So is President Obama trying to stimulate GDP by using a proxy of government spending rather than trying to resolve the decrease in consumer spending? It would certainly seem like he's trying to bypass the issue. And it would seem that he's willing to accept consumer savings and continue with negative government savings (deficits) in order to achieve a recovery. It raises some question?

  • What is the multiplier effect of a government dollar versus a private sector dollar?
  • What is the timing of the impact of a government spending plan versus a tax cut plan?
  • What is the impact of a psychological shift in consumer behavior towards increased savings?
  • Further, is the economic mix of 2/3 consumer spending the right mix for the U.S. economy?

Big questions, with no quick answers. And that's my problem - the spending bill was rammed through with such haste, there's no reason to believe that they were properly addressed in the process, or addressed at all. In the effort to undo two and a half decades of a slowly conservative shift in fiscal thinking, the Democrats have failed to properly debate the ramifications of what they've done. That is a dangerous roll of the dice on a Keynesian philosophy that although President Obama believes that debate with respect to FDR was long over, clearly at best case for his viewpoint the results on the FDR debate could be said to be inconclusive. And that's being generous.

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