Americans are sacrificing their savings to keep up with soaring inflation.
This burden has contributed to consumer sentiment reaching its lowest level in June since the University of Michigan started the survey in January 1978. And the progressive policies in D.C. could soon make this bad situation worse.
The personal saving rate, which is the share of after-tax income not used for consumption, declined again to 5.1% in June. This is after it reached 33.8% in April 2020, which was a record high since January 1959, after the first round of “stimulus” checks sent by Congress during the shutdowns.
There were two more rounds of checks sent by Congress, along with enhanced unemployment payments and other handouts that weren’t connected to work, which kept the saving rate historically high as many places were shut down and people made more from handouts than they did while working.
Remember, nothing is free.
Those handouts and other government spending contributed to more than $6 trillion in additional national debt, which the Federal Reserve then mostly monetized—leading to the generational high in inflation.
The higher inflation outpaced saving and income growth since then, as the costly policies came home to roost and cut the saving rate to 5.1%—the lowest since August 2009.
What will happen when Americans run out of savings? But there’s little reprieve in sight as inflation looks to keep rising or at least not abating soon from bad policies in D.C.
Inflation, which is the loss of purchasing power of your dollar, continues upward to 6.8% in June 2022 as measured by the personal consumption expenditure (PCE) price index—the highest since January 1982. The PCE inflation measure accounts for the substitution effect from high priced goods to lower priced goods. This isn’t reflected in the often-reported measure of the consumer price index (CPI) inflation rate of 9.1%, which is the highest since November 1981.
Both measures show Americans’ money isn’t going nearly as far as it did a year ago. In fact, families’ purchasing power is set to be cut in half in just 10 years at the pace of PCE inflation and even faster for CPI inflation.
This implies that in order to maintain the same consumption levels, households have to allocate more income to consumption than to savings. And many Americans are turning to increased debt as their savings dry up.
Household debt increased to a record high of $16 trillion in the second quarter of 2022. Not surprisingly, credit card debt grew the most by 13%, which is the fastest increase in 20 years. Moreover, household debt to real economic output passed the 80% mark at the end of 2021. It’s up to 82% in the second quarter of 2022, a historically high rate, as debt increased and the real economy declined for two straight quarters.
This share will likely get worse in the following quarters as Americans go through their savings and dip further into debt. And interest rates going up means the amount to pay interest on the debt will contribute to higher balances and more pressure to meet their financial obligations.
No wonder people don’t feel secure about their economic future. Bad policies by Congress and the Federal Reserve contributed to this destruction and could even make things worse.
Congress spent too much, leading to massive deficits, which gave the Fed debt to purchase to inject money into the economy over the last two years. That inflated “boom” had to eventually “bust.” And that’s what is happening now as the redistribution by Congress has slowed some and the Fed is finally raising its target interest rate allowing markets to correct.
But Congress should be spending much less and the Fed should be more aggressive in tightening the money supply and raising its interest rate target. The famous Taylor rule suggests a rate of at least 6%, which is substantially higher than the current range between 2.5% to 2.75%.
Ultimately, what’s needed now are pro-growth policies of spending, taxing, regulating, and printing cuts instead of what’s coming out of Washington. President Biden and Democrats in Congress aren’t helping the situation with the “Inflation Reduction Act,” as it will lead to more debt and more inflation that will further deplete savings, thereby making a bad situation worse for Americans. Things must change.
Published at TPPF with Daniel Sanchez-Pinol
Vance Ginn, Ph.D.