Should You Save?

07/13/2009 12:01 am EST

Focus: MARKETS

Terry Savage

Author, The Savage Truth on Money

Is it our “patriotic duty” to spend America back into prosperity? That’s not an idle question. As Baby Boomers come to grips with the concept of “retirement” there’s been a sudden panic, a rush to savings. The huge generation that led America to economic growth through their spending is now leading the spending slowdown with a savings binge.

In June, 2005, the American savings rate turned negative as many people were using their credit cards and home equity loans to maintain their lifestyle. Since the American consumer has traditionally accounted for 70 percent of the economy, this propensity to spend kept everything from homebuilders and Home Depot, to Wal-Mart, and Neiman Marcus, reporting big profits.

But now, with lifestyles threatened and retirement accounts decimated, the Baby Boom generation has turned in the opposite direction, squirreling away dollars as if a deep winter loomed. The savings rate has shot up to six percent—still far from its double-digit peak at the end of the 1981-82 recession, but give it time. Is that good news, or bad?

Savings is a good thing, as I’ve long advocated. But at this juncture of the economic cycle the new savings binge is also dragging out the recession, and putting a lid on the recovery. If everyone stops spending on anything but the most basic necessities, how will the American economy recover? And how will we lead the world out of this financial crisis?

Less than a decade ago, boomers were planning on selling their homes and moving into luxury condos and townhouses to ride out retirement. Now they’re watching home equity disappear, along with their 40l(k) balances. They aim to replenish their losses by holding tight to their remaining income. This “hunkering down” has hit the economy hard. 

The generation that made its impact at every stage—from expanding the need for public schools in the 50s, to rock and roll, the Beatles, and McDonalds—is now making its mark again—by saving. I’ll ask again: Is that good news, or bad?

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