ECONOMIC ANALYSIS: Americans’ spending binge is ultimately unsustainable

Americans don’t save much these days. Twenty years ago, our 9-percent rate of savings was troubling and somewhat embarrassing, compared with the double-digit savings rates of other industrialized economies. But that rate seems sky-high compared with today. If savings rates remain as low as they’ve been the last few months, we may have to rename them.

Dis-saving rates? It’s an odd-sounding word, if it even is one. But what else do you call a negative savings rate? According to the Bureau of Economic Analysis, consumers have been spending more than their income for seven of the last eight months. In fact, when we talk about an improvement in the U.S. savings rate, as has occurred since September, we’re describing a situation where the savings rate becomes less negative.

Since 2000, the savings rate has averaged a minuscule 1.9 percent in the national economy, and it’s a safe bet 2005’s average won’t come close to even that low target. If you think this situation is unsustainable, you’re right-it is. But if you think it is dangerous or irresponsible, you might be surprised.

The savings rate, and the amount of savings, or wealth, that individuals have, are really two different things. The rate of savings tells us, in any given month, how much of the income we earned is left after we are done spending. In fact, the statisticians don’t really know how much you’ve socked away in your various accounts in any given month. The savings rate is computed as a remainder, and represents the flow of income into savings.

And there are plenty of factors that have occurred to slow that flow to a trickle, or even to reverse its direction. Let’s start with housing markets.

Whether or not you think the housing boom is over, you’ve got to admit it’s been a long ride. Consumers are sitting on a lot of housing wealth these days, and thanks to innovations in the lending industry, they have plenty of ways to tap into it. If my house value-and hence my wealth-has grown $50,000 and I decide to spend $5,000 of that by writing a check on a home equity account, my nest egg has still grown, correct?

But the cumulative effect of the millions of equity loans and home refinancings that give consumers cash to spend has brought savings rates down dramatically. Your home’s appreciation won’t show up as income until you sell, but the cash you spend from drawing against your increased equity does the month you spend it. The result is exactly what we’ve been seeing-a very low rate of savings, as computed from the remainder.

And homes aren’t the only assets that have grown in value. In fact, you could make a strong argument that very low savings rates on the part of consumers are completely rational, given that the strong gains in stocks and real estate are boosting their wealth and reducing the urgency to set more money aside each month. Besides, with interest rates still fairly low, the incentive to save is lower as well.

But it’s a very unbalanced situation, any way you look at it. Most wealth accumulation strategies that rely on continued, above-average returns in existing investments crash on the rocks of the reality of the next market downturn. Asset prices are full of risk, and housing prices-not to mention loan refinancings-are particularly vulnerable to the pinprick of higher interest rates that could be just around the corner.

It’s how-not whether-the whole thing unravels that has policymakers at the Federal Reserve and elsewhere up all night. The paradox of thrift is that if we all start saving for a rainy day, our joint actions will guarantee that day comes tomorrow. Increased savings will move us to a more sustainable growth path, but at the expense of some growth today. It’s a delicate balance, and here’s hoping the new Fed chairman will have the skill to manage it.