Another Silver Lining to This Recession

From the diaries by Erick.

U.S. household debt is falling and the savings rate is on the rise.

Economists say consumers appear to be curbing their spending and displaying a healthy prudence about taking on new debt — something financial planners have been admonishing Americans to do for decades.

What economists don’t know is whether people are bringing down their debt voluntarily or whether it’s being imposed on them through foreclosures or the denial of credit.

Whatever the reason behind this change, it is inherently a good thing as long as it creates a long-term trend among the generations living through these tough times. (Much like the Depression generations learned how to live much more frugal lifestyles than their predecessors – my grandparents died with thousands in the bank still.)

Household debt declined 0.8% in the third quarter, mostly as a result of a 2.4% decline in mortgage debt, the Fed reported. Other consumer debt, which includes credit card debt, rose a modest 1.2%.


But it’s also true that Americans are saving more. The savings rate, a meager 0.2% in the first three months of the year, rose to 1.1% for the third quarter.

And that is even a marked improvement over the savings rate from two years ago, which was actually negative!

A consumer that is smarter (using less debt and saving more for the long-term) will produce economic growth that is sustainable. When we get drunk on credit (as we had been for the last decade) we create bubbles. Every bubble pops. Let’s hope that people learn the tough lesson of living on what you make (or better yet, only living on 80% of what you make and saving the rest for kids’ educations, retirement, etc).

Cross-posted at The Minority Report.