Thursday, October 9, 2008

Saving vs. Consumption: The Age-Old Dilemma

Economists have long pointed to the lack of savings in the United States, which has contributed to the current financial crisis. The magnitude of U.S. debt is truly staggering: a $700 billion annual current account deficit, a $500 billion annual budget deficit (likely to reach a trillion dollars as the Treasury borrows money to implement the “rescue” package), private credit card debt, and so on. Roughly half of publicly-traded U.S. Government debt is held by foreigners. Foreigners also finance the current account deficit.

The result of too much spending and too little saving was aptly set forth in Chapter xii of David Copperfield, in which Charles Dickens spelled out the consequence of overspending:

“Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

Wall Street financiers and analysts nonetheless proclaim that recovery from the current downturn requires consumers to open their wallets and purses wider. This will presumably happen when consumers feel comfortable to borrow and incur more debt. So much for increasing savings.

1 comment :

veeschay said...

Whenever any government inflates the currency, with the resulting rise in prices, the people tend to spend more because their savings continually lose value. It is tempting to take on debt in the hope of repaying in devalued currency. It is not corporate greed that is to blame, but government greed. Combine this with the ability to print more and more money and it is no wonder that spending outstrips savings.