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Saving Shm-aving

Former Dallas Fed president Bob McTeer says the the rise in personal saving we saw last week was an illusion:

The national saving rate is composed of the personal saving rate, the business saving rate, and the government saving rate. The personal saving rate is disposable income minus consumption; government saving is equal to its budget surplus. A budget deficit represents negative saving by the government.

What happened in May was that the government increased its budget deficit (increased negative saving), borrowed the money, and paid it to individuals as part of the stimulus package. Since individuals saved less than 100 percent of their higher income, they added less to saving than the government subtracted from it.

Assuming no offsetting increase in business saving, the national saving rate declined in May. Chances are, however, that business saving declined as well. If so, the decline in national saving was even greater.

A decline in national saving will necessarily be matched by a decline in national investment if it isn't made up by more saving imported from abroad. We import foreign saving by running a larger current account deficit, which requires an equally larger capital inflow to finance it. For many years now, we've had to supplement domestic saving with foreign saving to finance domestic investment. This runs up our total debt owned by foreigners and increases the burden of servicing that debt in the future.

I'm sorry, but borrowing the money to save doesn't work.

I don't know if that last statement is always true. The following chart shows net saving as a percent of gross national income since 1929 for the government (red line), individuals (green line), and the combined effect of the two (blue line):

In the early 1940's, heavy government borrowing was coincident with high levels of personal saving. But the key was that the combined effect of the two was in positive territory. And since 1929, the historical average for combined government and personal saving has been 4.3% of gross national income. The latest available data through the first quarter of this year has this figure at -3.2%. Which is why McTeer's larger point is probably right on: It's going to take either a massive pullback solely on the part of consumers or a combined one by both consumers and Washington to reduce the amount of foreign borrowing we're doing.

--Zubin Jelveh