Consumers Saving to Save the US Economy

Markets were closed in America yesterday. But there’s still reckoning to do. So, we’re on the job as usual.

As predicted in this space, Americans have gone back to saving.

You’ll recall that household spending increased earlier this year despite flat or falling income. Top economic pundits hallucinated that the correction was over. They said the private sector was not de-leveraging after all. Instead, households were going back to their own spendthrift habits.

But it couldn’t last. Because households 1) don’t have any money, and 2) don’t have anything to borrow against. Unless there’s a surprise boom in real estate, households will have to get back on the wagon. They need to de-leverage. And they know it.

The latest from Bloomberg:

US Economy: Spending Pauses as Households Rebuild Savings

“Consumer spending paused in April after growing in the first quarter at the fastest pace in three years as Americans used gains in wages to rebuild savings.

“The savings rate climbed to 3.6 percent last month, the highest level since January, from 3.1 percent in March as incomes increased and purchases cooled.”

What happens when households pay down debt rather than borrow more? Business sales and profits go down. The economy slows. Corporate stocks are worth less than they were before…at least, those who make their living selling stuff to domestic households, which is most of them.

Makes sense too. Households had been fattening business profits by buying things they didn’t need with money they didn’t have. Now, they’re doing the opposite. Business profits are going down because households are not buying stuff – even when they have the money to buy it.

What did they expect? You can’t spend more than you make forever.

But what’s all this bellyaching about? Saving money is a good thing. It makes you richer. And it gives the economy the capital it needs to build new things. In China, for example, they’ve got a train that goes more than 400 kilometers an hour. At least, that’s what they tell us. China can build things like that because it has savings. (Among other things…) America can’t do it. It doesn’t have the money.

It’s tapped out. Up to its neck in debt. And trying to fight the correction by going in deeper.

By the way, you don’t get real economic growth by passing money around. Transfer payments reduce growth rates. You get growth by letting people earn money, keep it, and invest it.

India’s savings rate has moved up recently – to 40%! China’s too.

And the US? Well…3.6% is not going to set the world on fire. But at least it is positive!

And if you think people are bellyaching now…just wait until savings rates get back up to 10%! That will be equivalent to taking 7% of GDP out of the consumer economy.

Meanwhile, de-leveraging is beginning in the public sector too. Well, on the whole, governments are still adding debt. But at least they’re talking about de-leveraging.

Stocks fell on Friday, with the Dow down more than 100 points. Why? The papers reported that investors were worried about Europe. The rating agencies were taking a look at Spain’s debt; they are going to downgrade it. At least, that was the story. Meanwhile, there was a rumor that China was going to stop doing business in euros.

The China rumor turned out to be totally unfounded. As for Spain’s debt, again, what else would you expect?

Let’s see, Spain owes a lot of money all over town. It falls on hard times – with 20% unemployment – so its revenues go down. Hmmm…it’s going to have trouble. It will have to make deep budget cuts in order to reassure lenders.

But that is what is happening…or should happen…everywhere. Debt is like chocolate sundaes. One is a treat. Two are a challenge. Three are a menace. Four will make you sick.

Throughout the developed world, countries are still adding to their debt. But the Europeans are beginning to push back from the table. At least, they are pretending to have had enough:

“No… I couldn’t possibly… Oh…well…maybe just a bite…”

Practically every one of them has promised to begin a new diet. After the holidays!

Bill Bonner
for The Daily Reckoning