America’s Saving Rate and the Dollar’s Future

American households' saving rate has increased sharply since the beginning of the year, as falling equity and home prices have rapidly eroded their wealth. But, while that should lead to a lower dollar, which would narrow America's trade deficit and stimulate employment, the sharply higher US fiscal deficit will complicates matters considerably.

CAMBRIDGE – The saving rate of American households has risen sharply since the beginning of the year, reaching 6.9% of after-tax personal income in May, the highest rate since 1992. In today’s economy, that is equivalent to annual savings of $750 billion.

While a 6.9% saving rate is not high in comparison to that of many other countries, it is a dramatic shift from the household-saving rate of less than 1% that the United States experienced in 2005, 2006, and 2007.

Before it began rising last year, the US household saving rate had been declining for more than 20 years in response to the increasing level of household wealth. The rising stock market and the higher value of homes induced individuals to consume more of their incomes and to save less. As a result, most working individuals reduced the amount that they saved for their retirement, and retirees were able to increase their spending. The net saving rate fell to near zero.

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