Saving: Bad for the Economy?

Saving money is a wonderful thing. It gives banks money to invest, it gives the average person money to invest, money is thrown into markets that would not have otherwise seen those dollars, and the list goes on. Unfortunately, the economy we live in is driven by consumer spending. Money circulates even further, creating jobs and supporting industry, if spending rises or stays static.

The savings rate, which used to be reflected by negative numbers, has risen all the way to 5.7% in April. (Here’s a hint: If savings rates were once in negative numbers, we were spending more than the money we made.) In a time when what we really need is spending, that is when Americans have decided we are going to save. That is so amazingly backward. Let’s spend when we really need to save and let’s save when we really need to spend.

The economic problems we are currently facing were somewhat created by the large amount of personal and government spending, fiscal irresponsibility, and escalated debt. Unfortunately, personal spending, not government spending, mind you, on a small scale from a vast array of consumers, is actually one of the best repairs for the economic problems we are in right now. The funny thing is that most Americans thought they were already saving. They thought a lot of what they were spending was considered saving: home improvements to raise home value, real estate purchases, and much more, expecting these were all investments, with the hope of a positive return. This was further fueled by even higher home values and a corresponding “wealth effect”. Investors felt the same way about the stock market. Investments in the bank were low, creating falling CD and saving account interest rates. It was logical, however, due to a much less return from banks than alternative investments. “What drove the savings rate down was stock price appreciation and housing appreciation. People spent on those because they thought it was like saving,” said J.P. Morgan Chase economist Bruce Kasman.

The belief that investing is saving was obviously wrong, because it helped lead to the depreciation of banks, helping to cause this disaster. The proper saving is always good for a thriving economy. However, right now, no saving is good for the economy. Nobody had been saving before, so saving now is the right mode of recovery. Spending, which is growing, will actually be one of the most effective economic recovery actions the recession has seen. When the economy has recovered, all the indexes are solid, and joblessness is not so pitiful, feel free to save again… the right way.

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