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.