“Crowding Out”: Coming Soon to a Lender Near You

In a “closed economy,” savings is the source of all capital (textbook: “a country can invest no more than it saves”). With open economies, there is the possibility to tap the savings of other countries. It is the ability of the U.S. to borrow from the rest of the world that has permitted us to have solid growth in consumption as well as in investment (new homes construction, commercial construction, industrial equipment, etc.) which has amounted to around 15 percent of GDP while our savings had amounted to substantially less.

The economy imploded in the fourth quarter of 2008 when consumers decided to move their savings rate (out of disposable income) from near-zero levels to around 5 percent. (Sounds good but it’s nothing to brag about. In the late 1970s, the US savings rate was over 10 percent.) This meant that retail sales declined by hundreds of billions of dollars, starving the bloated number of strip malls, retailer outlets and restaurants built to feed our partying during the 2003-07 period. Click here to read the full post and comment (Insights subscribers) »