Americans are saving!!!

Sounds oxymoron!!!

The Americans are spending less and saving more. Americans' savings rate, as a percentage of after-tax income, rose to 2.9 per cent in the last quarter of 2008. That's up from 1.2 per cent in the third quarter and less than 1 percent a year ago. Even more contrasting when one compares it with years 2005-2006 period when American consumers were spending more than they were taking home after taxes. The savings rate was a negative 0.6 percent in October 2006. In other words, the typical American spent at that time $100.60 for every $100 of take home pay. Was the negative savings rate sustainable over the long run? Some economist suggested the answer was 'no' and it would end with consumers cutting back on spend leading to the recession!!

Is American's saving good ??

Economists call it the "paradox of thrift." What's good for individuals — spending less, saving more — is bad for the economy when everyone does it. When the savings rate rises, spending falls. All of sudden the life philosophy changes to 'If you want something, you have to have the money for it'. Consumer spending, in fact, accounts for about 70 percent of gross domestic product, the broadest measure of the nation's economy. When consumers refuse to spend, companies cut back, layoffs rise, people pinch pennies even more and the recession deepens. The ripple effect has been brutal. The American economy shrank at a 3.8 percent annual rate in the final three months of 2008, the worst showing in 26 years. The biggest reason was that consumer spending fell for a second straight quarter, something that hasn't happened since the 1990-91 recession. Analysts believe the hard times will persist in 2009 as consumers, squeezed by layoffs and tighter credit, delay purchases of cars and other big-ticket items. Some experts say consumers have been so shaken by how fast their wealth has shrunk, so burned by credit card debt, that they might not resume their robust spending for years, if ever.

The Japanese way...

Realizing this, the Japanese Government has announced a massive cash handout in an effort to reverse the crash in domestic consumption. It has announced a $30-billion package giving each needy Japanese approximately $ 180 pm to spend and spur Japan's domestic consumption. The strategy looks apt for Japan like economies which depend largely on export. Making citizens spend will entice the domestic manufacturing and services sector to produce more even during sluggish export demand. Economies like the US and UK have a far better domestic consumption compared to Japan or Germany. Increase in domestic spend will improve their domestic consumption leading to increased domestic manufacturing and service requirements. Any gaps in these areas- which are wide both in the US and UK- will warrant exports into the country. This, in turn will spur the economic activities of the exporting countries, most of which, still depend on matured economies for research, IP, hi-tech and similar services. Ripple effect is a revival of such high end activities in developed economies encouraging further spend and consumption. Reason why, the UK government is already defined their policies to ‘spend its way out of recession’.

The US instead of merely giving bail out packages to corporate - which is spent mostly on executive bonuses and pay packets-should try to take steps to influence its citizens to spend.

After all, one saves for a rainy day!! Consider this recession as the monsoon season. Hence, hey, Americans please spend your way out of recession and help the world too!!!