by Calculated Risk on 8/02/2005 07:18:00 PM

General Glut notes today that savers have reached the Rubicon of zero savings. But will they cross it? Dr. Hamilton had a recent discussion on savings and showed that the rate has been declining for 20+ years.

CNN has an article, The zero-savings problem, tying the recent lack of savings to the housing boom:

Even as a government report Tuesday showed the national savings rate at zero -- that's right nada -- the rise in the value of homes has given the average U.S. household a net worth of greater than $400,000, according to a separate report from the Federal Reserve.

Household real estate assets have risen by just over two-thirds since 1999, and the run up has enabled consumers to spend more money than they are bringing home in their paychecks. They're viewing their homes almost like ATM machines, using home equity loans and refinancings to pull out cash and support a higher level of spending.

"[Rising home values] are making people feel they don't need to save," said Lakshman Achuthan, managing director of the Economic Cycle Research Institute.

That means they are spending more of their paychecks than they would otherwise. That's good news for the current economy but it could cause trouble longer term, according to some economists.

And that could mean problems ahead:

The low savings rate has kept consumers spending, which in turn has kept the economy growing.

"We've backed ourselves into a very dangerous situation," said Dean Baker, co-director of the Center for Economic and Policy Research. "The economy is dependent on everyone consuming like crazy. If everyone heard my diatribe and said, 'Yeah, we better start saving,' the economy would go into a recession."

And while it's not going to be the warnings of economists that start people saving, the slowing of housing price growth or actual declines will put brakes on the spending as people will run out of equity they can tap.

The savings rate will also have more downward pressure as Baby Boomers start retiring and drawing down on retirement savings. While Social Security benefits count as income, withdrawals from 401(k) and other retirement accounts do not.

So if there is no change in the spending habits, the aging of the U.S. workforce could soon make zero or negative savings rates the norm.

"I find it just odd for all these economists and policy makers to be cheering for all this consumer spending when we're just digging ourselves into a hole," said Brusca. "With all the obligations we have ahead, to retirees and to ourselves, we have all the reasons in the world for people to be saving more and be controlling their spending."