How America Stopped Saving

Chart of the Week #18

In a recent Forbes Advisor survey, 56% of Americans reported having less than $2,000 in savings, and nearly 20% said that they had no savings at all.

These results confirm what similar studies have shown in the past.

Let that sink in for a moment. In a country that used to pride itself on thrift and financial savvy, the majority of people don’t even have two grand saved up for a rainy day—let alone the ability to invest and better their financial situation.

Today's chart showing the dramatic six-decade-long decline in America's net savings rate as a percentage of national income might help explain the origins of this situation.

In the 1950s and early '60s, the golden age of the American middle class, savings rates regularly stayed above 10% (peaking at 13.1% in 1965). This was a time when financial prudence was deeply ingrained in the national psyche. Families prioritized saving and building nest eggs for the future.

But then something changed in the '70s. Savings rates dropped below 10% and kept falling. By the '80s and '90s, the rate fluctuated between 5% and 7%, a far cry from the double-digit figures of earlier decades. By the 2000s to 2020s, it often approached 0% and even dipped into negative territory.

Note: When net savings turn negative, we start spending more than we earn. This overspending happens as individuals, businesses, and the government drain their savings or rack up debt to consume beyond their means. It’s a warning sign that a nation is living large on borrowed time.

Now, it’s not a coincidence that this trend has been around since the '70s. I talked about it in previous issues of Chart of the Week, both here and here.

And don’t be fooled by the recent spikes around 2020. This wasn’t a sudden return to financial responsibility; it was a fear response driven by government stimulus checks and lockdown-induced frugality. As soon as things settled down, the savings rate dropped again in 2023, like a bungee jumper hitting the end of their cord. You can see this in the graph above.

Doug Casey: Saving means taking the excess of what you produce over what you consume and setting it aside. It’s basic and essential, because it creates capital. It is capital, in turn, that allows you to advance to the next level. An individual or a society that doesn’t save will soon find itself in trouble.

So, how did we get here?

The Federal Reserve, that great manipulator of the money supply, has played a starring role in this tragedy. Through its relentless suppression of interest rates, it has created an environment where saving is a fool's errand and debt is king. Why save when inflation eats away at your nest egg faster than you can build it? Better to spend now, or so the logic goes.

Now, what you don’t see in the chart above is that as personal savings have plummeted, the welfare state has ballooned.

It's a perfect symbiosis of dependency, you see. The less people save, the more they rely on government handouts. And the more they rely on handouts, the less incentive they have to save. It's a vicious cycle, and it's by design. A population that's financially independent is harder to control, after all. That doesn’t really work for those in power.

Have a great weekend!

Lau Vegys