Savings Rate is High Despite Interest Rates Being Low
Yesterday we looked at the three basic factors that determine the real interest rate. One of these factors was funds from savers.

I mentioned that there is an assumption that the higher the real interest rates are, households will choose to postpone some current consumption and set aside or invest more of their disposable income for future use.

So let’s put that to the test in the Year of Our Lord 2020.

We know right now interest rates are historically low- that should also encourage households to be consuming a lot and saving very little, right?

Right?

Nope. Not right now at least.

Because of the pandemic, the personal savings rate is 17.8%!

Post media

As you can see from the graph-we are at record breaking levels. People don’t care that interest rates are low- they are worried about their jobs and their paychecks and so they are saving as much as they can in anticipation of tough times ahead.

We need to update our mental modal from yesterday- not to what should happen when interest rates go down, but what is happening. And it looks like this:Post media

What do we make of this dynamic? There is pent up demand in the system. Households are saving more than ever because they are scared, but also because there is less to buy and do in the middle of a pandemic. It has been hard to access services.

As services open back up, there will be plenty of demand for it.

There’s your bullish thought for the day.
Kerimcan Oral's avatar
Could this partly have something to do with the stimulus measures? I believe disposal income was actually up on a net basis in the last couple months. If income went up and expenses stayed the same, then this would also push up the savings rate. Your point still holds though; If households felt great about the economy, the incremental income would probably have ended up being spent (and stimulate the economy more)
Nathan Worden's avatar
You’re very right! That’s a point I forgot to mention that certainly contributed to the astronomical savings rate. In April the government started sending out $1,200 to every American and it looks like most people ended up saving it rather than spending it.

For comparison, the recent CARES act was $2 Trillion while the ARRA act of 2009 was $787 billion (although the majority of ARRA went to government programs and tax rebates rather than checks sent out to people.)

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