Fellow Americans, Stop Saving!

It can be a case of too much of a good thing.

By SHARE

Yes, yes, we all need to save more and spend less. So the scolds keep telling us. But this change of behavior will have consequences, as superstrategist Ed Yardeni notes:

We are told: Americans must save more. Maybe so but that won’t be good for our economy. I’ve heard some observers casually claim that the personal saving rate must go back to 8%. If it did that during the fourth quarter of last year, real GDP would have been down by 17.9% instead of 3.8%. Let's do the math: The personal savings rate was 2.9% during Q4-2008, up from 1.2% during the previous quarter. If it was 8% at the end of last year, real personal consumption would have dropped 23.0% instead of 3.5% and real GDP would have been down 17.9%. Obviously, no one is saying that the saving rate should rise so much in such a short period of time. However, if consumers really do decide to save more on a long-term basis, then the size of the economy would shrink since consumers account for so much economic activity.