Lowest Savings Rate Since the Great Depression

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Lowest Savings Rate Since the Great Depression

Usually when people continue to spend more money than they earn, for month after month, it is because they are experiencing an unexpected financial problem—a lost job, or medical bills for an ill dependant. Why then did Americans on average spend everything they made—and then some—month after month, over the last two years? Does the economy face a problem that the financial prognosticators have missed?

The Commerce Department reported February 1 that the personal savings rate for 2006 was a negative 1 percent, more than double the negative 0.4 percent rate of 2005. Prior to 2005, the only other time America’s savings rate was in negative territory for a full year was in the midst of the depression in 1932 and 1933.

A negative savings rate means that people had to dip into savings, sell assets, or borrow extra money to finance purchases.

The reason behind the dismal savings rate clearly is not mass unemployment as was the case during the 1930s when a full quarter of the working-age population was out of work.

Why, then, the lack of savings today?

According to some economists, it is because many people feel they don’t need to save and instead can rely on rising values in their homes and stock portfolios. Another theory is that people are attempting to maintain their current lifestyle even though wage gains have not kept up with inflation and the effects of global competition (Associated Press, February 1).

Either scenario is fraught with risk, and can bode ill for one’s financial security. A lack of savings means that people may be becoming over-exposed and reliant on continual asset appreciation. This can be a very risky position to be in, especially since the stock and housing markets are known for corrections and extreme bouts of volatility that can last for numerous years.

If the economy slows, many big shoppers may regret not taking the opportunity to put a little extra aside for a rainy day.