Wednesday, June 14, 2006

An economic insight?

One of the great laments and causes of consternation I see among economists is in regard to the savings rate. Basically, the US resident is saving less and less of their income - to the point that they've actually spent more than they've earned in a couple of recent quarters .

I had an insight recently as to why this may be happening. Basically, i'ts a slow-motion version of what happens in a hyperinflationary period. That is, why bother to save when what you save will be worth less (or even worthless) when you need it?

For all currently employed US citizens, inflation in the United States has been a constant, with a nominal rate slightly over 3%.

This means that if I save $100,000, in 20 years it'll buy the equivalent of $50,000 in goods. If I get 3% interest from the bank, it'll buy as much tomorrow as it buys today - which means I lost the use of my money for no real gain. Why, then, should I save instead of buying?

You can see this writ more broadly in hyperinflations. People get their money and spend it immediately. Ideally they get something for a promise of payment later, because the promised money will be an effective savings. Yes, this also explains the increasing debt load of the nation - sure, it's staggering, but due to inflation the 'practical' cost of it is less. All you have to do is make it through the growth window while your income catches up.

I'll be pondering this for a while. I think it's got major implications for the next decade, but want to get this down so the basic key isn't forgotten - even if I later have to change my mind due to being wrong.


Blogger Inigo_de_Montoya said...

Our "savings" is camouflaged. There is the payroll deduction into my wife's retirement account. (Despite this, both our retirement accounts are woefully insufficient). And we're accumulating close to $1,000/month in equity on our townhouse...equity that may disappear just as quickly if the real estate market softens.

Where we are extremely uncomfortable is in "ready reserve" cash for emergencies. We don't exactly live paycheck to paycheck but it's like a trapeze one commission check comes in and is allocated, fingers are crossed that another one will be on the way soon.

(Hi, Kirk. I do check your blog virtually every day.)

6/15/2006 1:31 PM  
Anonymous Prince Hydrajak said...

I'm very liquid right now. I'm terrified that my cash will disapear due to the new Fed Chairman "pritning money and tosssing it out of a helicopter" (My Scooby Doo Quote)

However I'm equally glad I didn't buy 20K in gold coins a month ago....

6/20/2006 4:40 PM  

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