For the past two years, Americans have been very naughty. After many years of saving around 2% of our disposable personal income, we have now become a nation who, collectively, spend more than we earn. This doesn’t mean we don’t have any savings. We can have plenty of savings, and still spend more than we earn–this just means we are tapping into savings (or racking up more debt than savings) in order to fund our lifestyles.
The U.S. Bureau of Economic Analysis is non-partisan. They do their research and record keeping just the same whether a Republican or a Democrat is in the White House, and the news isn’t good.
What is disposable personal income? “The total amount of money available for an individual or population to spend or save after taxes have been paid” according to the New Dictionary of Cultural Literacy.
Everyone has a different disposable income, high, low, or in between. But everyone has pretty much the same choices around how to dispose of it. How much will go to housing? How much to transportation? Food, clothing, utilities. Some costs are fixed–or we think they are fixed, for instance our housing or utilities. But in fact, we have a lot of choices there, too, for instance living in a cheaper place, living with roommates, etc.
So in this sense each of us is in the same situation: how much money comes in, how much money goes out, and whether we are spending more than we earn. Great wealth makes no difference here, because even someone fabulously wealthy can spend more than he or she earns.
Why can’t we (collectively) live within our means? Not so long ago (i.e., up through 2004) Americans on average were saving about 2% of their disposable income, though previous generations saved much more. (Americans saved 10% of their disposable incomes, on average, in 1980). But we have been in negative territory more than 7 quarters in a row, and it shows no sign of getting better.
We know what happens when we as individuals, over time, spend more than we earn: we go into serious debt, which spirals downward into unmanageable payments, usually leading to bankruptcy followed by some very difficult situations, like how to rent an apartment or finance a car when your credit is shot.
But what happens as a nation when we consistently spend more than we earn? Well, something similar I guess. I think we’re about to find out. The signs are very bad that America can keep its current place in the world, with our lack of savings, our national debt, our trade imbalance, etc.
Owing a ton of money to other nations (or to international megabanks) means that effectively, they dictate the terms of our activities. I’m sure at that point, people will blame these “foreign dictators” for grinding us down. But our situation will be a result of many years of not living within our means, individually and as a nation.
By the way–the current personal savings rate in China is 30%.