So recently I hit some data that hit very close to home, it discuss one of the highest threats to our economy right now, something that’s not bring seen in decades and if the current trend continues we can be in for a very rough time ahead, now if you’re thinking this Is about the 35 million people who are unemployed or about a national debt with no plans to pay back anytime soon: Nope, if you’re thinking about the thousands of business filing for bankruptcy: Nada.
So if it’s not any of those things then what could it be and why are there so many Americans hoarding cash, last week one of the biggest headlines on the news is that we have a new threat To our economy, people are saving like it’s the 1980, that’s right people are now saving too much money and that’s going to be the downfall of the economy, after all if people are not spending as much money then that means business have fewer customers, which means business can’t afford to hire more people, which means more people are laid off unemployment remains fairly high, which means wages end up going down, the economy ends up going down and paradoxically people will end up saving Less money because they’re making less money and they don’t have as much money to spend and that sends us down unto this endless spiral of the abyss and it’s all because people are saving too much money, so let’s go over all the Data, what this means for the economy and how bad it is that the average American is now saving like it’s the 1980, because I’ll tell you right now there’s an element of truth to this and it can be a problem especially if we’re talking about the economy recovery that’s dependent on people spending money.
Basically the conventional wisdom is that we should save a portion of our income and the more money we save the better off we’re going to be. But to counter that argument is that we need people spending money because otherwise business won’t be doing as well, when they don’t do as well, they hire fewer employees and the fewer the employees that they hire the less money you can make and therefore, the less Money you can end up saving, so saving money is good for you but saving too much money is bad for everybody else, and that’s where the problem lies.
Now there was an article that says that the average American savings rate hit 13.17% in March, meaning for every $100 that was earned, 13 of those dollars were saved and almost doubled for the month prior and this happens in a time when credit card usage have almost increased since 1983 and has reached its first decline since 2011.
So what exactly is bad about all of this, I mean we shouldn’t be truly celebrating that people are finally taking an interest in cutting back on their expenses and saving more money and having a bigger safety net to fall back on. Well the answer to that is surprisingly a bit of a yes and a no, and before I go into the details I think it’s really important we look at the savings rate has increased in the previous recessions because I found that really interesting.
When I began to research the average savings rate over this, I noticed that the savings rate immediately spiked upwards and as the economy does better the savings rate tends down, this tells us that people can and do cut back on the spending when needed, and as soon as the economy is looking better and people start looking more optimistic, people begin to spend as usual and save less money, we can even begin to see this happen right now, like not even a few months after all these has started, MasterCard reported that more people have began using the credit card and this gets even better, and when you look at this and compare it with the unemployment rate, you’ll see how they mirror each other, outside of everything going on right now, you can look back in history, the higher the unemployment rate the more people will save money and as soon unemployment begins going down people starts spending money again.
So here’s the thing, it’s not surprising why Americans are saving at a unusually high amount of money compared to the previous years, so many people are out of work 25% of the entire economy has being temporary shut down and when people are strongly urged to stay indoors, it becomes nearly impossible for then to go and spend money in the first place.
They can’t go out to restaurants, they can’t go to movie theatres, almost all recreational activity are shut down and it forces people not to spend and have more money left. Now if you combine that with the uncertainties of our economic future these figures are not surprising at all, however I’m terns of what it does to the economy, we can’t deny that the economy does benefit from a surplus of spending, the more money gets spent, the more it circulates around and the more the economy can grow and what’s bad for business or after growth however if people are not spending money then eventually it has to go somewhere and the more people are saving the more people will have leftovers to invest or spend later, when the economy improves, which means at some point, it’s going to end back up in the economy anyway, another benefit is that the more money people save, the less money us being spent on debt repayment, the less money is being spend on bankruptcy files and the less money is being spent on payday loans, and that’s more free cash flow that’s left over for others more valuable expenditure.
In fact you need time now when many businesses eye forced to shutdown, many people were forced out of work and it’s unclear how the demand is going to pick up once the begin to normalize.

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