Monday, January 7, 2008

Why Americans Don’t Save

Economists bewail the low savings rate of Americans, noting that the U.S. depends heavily on foreign savings to finance the gap between domestic investment and domestic saving. The consequence of sustained low domestic savings is the transfer of ownership of U.S. real and financial assets to foreigners. As foreigners increase their holdings of U.S. assets, they gain greater influence on U.S. domestic and foreign policies. Those who doubt this outcome should remember the golden rule: "He who has the gold rules."

An increasing number of prominent economists are calling for the Federal Reserve Board to sharply cut interest rates, down from the current 4.25% federal funds rate to a much lower 3%, to prevent a recession and help the U.S. economy work through the sub-prime mortgage problem. If the fed complies, it would follow in the footsteps the fed took under Greenspan in the wake of the bust in 2000, when it cut rates to 1% and held them low much too long. Easy money was a principal factor causing the subprime mortgage mess.

One percent interest on loans and deposits had two harmful effects. First, it reduced returns to savers across-the-board, thereby discouraging saving. Second, as individuals reach retirement age, they tend to shift assets to more secure fixed-income instruments away from riskier equities. When returns on certificates of deposit fall from 5% to 1%, many elderly lose a substantial share of their non-social security income.

It seems that savers and the elderly are being forgotten once again in the rush to cut interest rates. Economists who are pushing aggressively for cuts in interest rates should not be surprised when they discover that the savings habits of Americans continue to erode. Perhaps the light will come on when many of them retire and become more concerned with interest income and less with interest cost.

China Building

China plans to build 5,000 kilometers of highways in 2008, bringing the total to 60,000. China plans to have built 85,000 kilometers by 2020, roughly equal to the United States, completing its inter-provincial highway network thirteen years ahead of schedule. In addition, in the two years 2007-08, China plans to complete the building or upgrading of 693,000 kilometers of roads in rural areas, tying more villages into the national highway network.

Meanwhile, U.S. roads and bridges continue to deteriorate.

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