Munich Personal RePEc Archive

Savings; the least understood economic concept, the U.S. case

De Koning, Kees (2020): Savings; the least understood economic concept, the U.S. case.

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Abstract

Savings, in a financial sense, can be defined as postponed consumption. This definition implies that a household has to have an income first, before contemplating whether to spend such income in the current or in a future period.

In the U.S., the two largest accumulations of savings are in pension savings and in the net worth of homes. In 2019 the total pension savings added up to $32.3 trillion and the net worth in homes to $ 19.656 trillion; a combined savings of nearly $52 trillion. There are other household savings: in bank deposits and in shares and bonds. The current other debts by households are $4.6 trillion (car loans, student loans, personal loans).

The Federal government’s financial power derives from its tax income of $3.706 trillion plus its borrowings of an additional $1.1 trillion. These are no match for restoring a savings and spending equilibrium. The combined U.S. households are asset rich, but can, at times, be cash poor.

Should the U.S. government with the help of the Federal Reserve come to the rescue of the economy? It would need to borrow huge amounts. It would also need to create many new projects to spend such money. The result would be a substantially increased government debt, which at the moment is already at 106.9% of GDP or in other words already more than six times current government revenues. Future tax income will need to be used just to get the level of borrowings down, rather than for general expenses.

Would it not be better to use a small share of households’ own savings currently locked up in homes? The Federal Reserve, as a QE activity, could fund the scheme at 0% interest. Such a Tessa scheme: a Temporary Spend and Save Again method could release some equity out of a home, to be used for consumption in the current period. Current savings are turned into cash and future incomes can be used to replenish the stock of savings and repay the Fed.

The experiences from the last financial crisis in terms of adjustments are: the unemployment crisis took 10 years, before the number of unemployed was back to the level of December 2006. The recovery period over the losses made on the housing stock took nearly 10 years. Perhaps it is worth considering using household savings for household benefits. Such method can shorten the adjustment period dramatically.

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