For years, economists have lamented low savings rates in the
U.S. as potentially causing the downfall of the nation's economy.
Yet while those criticisms may have made sense in past years,
current levels of saving shouldn't surprise anyone -- and given
the attitude that many policymakers seem to have, savings rates
likely won't go anywhere but down for some time.
What goes up must come down
From one perspective, Americans have done a good job recently of
their savings. As fellow Fool Morgan Housel recounted a couple of
months ago, savers in the U.S.
boosted their savings rate
from a minuscule 1% all the way to 7.5% when the recession hit --
a huge move that amounted to between $600 billion and $700
billion of additional savings.
Given the big rise in consumer debt levels during the early
part of the last decade, that fiscal retrenching was much needed.
But now, even though the economy hasn't recovered very strongly,
the savings rate has moved back down again, hitting its lowest
level since December 2007 at 3.6%. Some economists see that as a
sign that people are getting back into old, bad habits of
A case of simple supply and demand
But before you panic and decide that the U.S. economy is moving
back to the reckless, overleveraged days of the housing boom,
take a step back and consider the current environment that savers
face. In particular, savers have to face an increasingly
unattractive set of options
in setting aside their cash:
- Savings accounts pay next to nothing, and even the best of
a bad lot are paying less. A recent check of rates showed that
) managed to get even to 1% on its savings accounts, while the
banking subsidiary of
) only pays 0.85%.
- Even if you're willing to lock up your money for five
years, it's tough to find banks paying a 2% rate.
- Rates on Treasury securities are even worse. Six-month
Treasury bills pay a whopping 0.05%, while a five-year Treasury
note carries an interest rate well under 1%.
- Savers seeking income of 4% or more -- the kind of income
they routinely earned from bonds and bank CDs before the
financial crisis -- have had to resort to buying
dividend-paying stocks. Yet while shares of several
high-quality companies, including
(Nasdaq: VOD) , and
) , currently meet that standard, savers are rightfully
concerned that investing in the stock market doesn't give them
the stability they'd prefer from the less risky side of their
Of course, if you still have credit card debt, the best return
you can get is to pay it off. With double-digit interest rates on
most credit cards even for cardholders with good credit ratings,
you can't match the return from paying down your credit card
balance anywhere else.
But once your cards are paid off, what comes next? Right now,
the current rate environment is rewarding those who are reckless
with their money, encouraging borrowing -- at least for those who
can get a bank to give them a loan.
The (not so) easy fix to bring back saving
If you want people to save, the solution is simple: Give them
more incentives to do so. While low interest rates encourage
ordinary people to take on risks they shouldn't, higher rates
reward them for being prudent with their money. Sure, paying
higher interest rates may not be good news for companies like
American Capital Agency
(Nasdaq: AGNC) , which have made big profits in part by borrowing
massive amounts of capital at the same low rates that savers have
had to accept. But if we truly want the American public at large
to manage their money better, putting up huge obstacles to saving
simply isn't the right answer.
Dividend stocks may not be the answer for savers, but to
long-term investors who are willing to take on risk, they're a
gold mine. Check out the Fool's brand-new special free report to
see our picks for
11 rock-solid stocks that pay great dividends
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