Monday, January 31, 2011

The Importance of Savings

The chart above shows the U.S. savings rate, which has been clocking in between 5%-6% for almost two years. This is an incredibly importance development for a variety of reasons.

1.) First, it indicates that people are not spending all of their earnings at once, but instead are putting some money aside for a "rainy day."

2.) It provides fuel for consumption. One of the big questions being asked right now is how can the U.S. consumer be purchasing more goods right now? The answer is he's been setting aside a lot more money

3.) Increased savings also helps to keep interest rates low. Increased savings leads to a larger pool of money for financial intermediaries to lend, which lowers interest rates.