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The Pandemic Is Accelerating the Breakdown That Began a Decade Ago

The Pandemic Is Accelerating the Breakdown That Began a Decade Ago

The feedback loop has reversed: by saving more, people will spend, borrow and speculate less, draining the fuel from any broadbased expansion.

In eras of confidence and certainty, people save less and spend more freely. When we’re confident that good times are not only here but will continue, we not only spend more freely, we’re more inclined to borrow money and speculate on the shimmering promises of more good times ahead.

In eras of uncertainty, people save more and spend, borrow and speculate less. There is an obvious feedback loop here: if people feel confident about their future prospects and have a measure of certainty about the general economic trend, they spend more, borrow more and speculate more, all of which feed the expansive mood that then encourages further spending, borrowing and speculating.

If their confidence collapses and the future is deeply uncertain, people save more as a hedge against bad things happening in the economy that could trigger hardships in their own household.

With this in mind, it’s interesting to look at a long-term chart of the U.S. savings rate, courtesy of the St. Louis Federal Reserve database (FRED). It’s easy to discern the waxing and waning of confidence / certainty in the decline or expansion of savings.

The broadbased prosperity of the 1960s is reflected in the high savings rate as cheap oil and real-world growth (as opposed to financial trickery and speculation) fattened paychecks while real-world inflation (cost of living) remained low.

The uncertainties of stagflation–oil shocks, recessions and soaring inflation and interest rates– pushed savings higher in the early 1970s. As purchasing power and speculative gains fell, so did the savings rate as households struggled to keep up with soaring costs of living.

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