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Savings

 
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arthur
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PostPosted: Sat Oct 30, 2004 9:48 am    Post subject: Savings Reply with quote

The U.S. marginal propensity to save fell to 8% of disposible income during the 1990s. Normally, this ratio is between 15% and 20%. During the recession and slow recovery of 2001-2003, there were some months when the savings rate fell below zero. Disposible income is income less taxes. Consumption is disposible income less savings. Disposible income increased from the three tax cuts in the early 2000s. Consumption increased from higher disposible income and lower savings. Moreover, there were two Wealth Effects (which influenced consumption): A negative effect from the lower stock market (e.g. IRAs and 401(k)s) and a positive effect from higher housing prices. Also, lower prices and lower interest rates increase consumption. Moreover, higher expected income and greater job security increase consumption (e.g. a permanent rather than a temporary tax cut).

The Consumption Function (or identity) is: Y = C + I + G + NX (or C = Y - I - G - NX). Y (income = GDP = output) has generally been supported by C (consumption) over the past few years. I (investment) and G (government) haven't been strong, while NX (net exports) has been negative, i.e. the growth in C has outpaced I, G, and NX. I = S (savings). However, net foreign investment (from trade deficits) and new housing, along with an inventory build-up, have contributed to investment, and tax cuts have contributed to C through G indirectly (the U.S. budget deficits are caused by lower revenues, e.g. lower tax rates, and higher expenditures, e.g. homeland security).

Therefore, a rising price level, rising interest rates (including mortage rates), and greater export growth than import growth (e.g. through a weaker dollar or higher import prices) should induce greater domestic savings. Also, a change in tax policy, e.g. Social Security reform or larger tax credits for IRAs will contribute to higher savings. The 80 million baby-boomers, in general, have not saved enough for retirement. A higher level of domestic savings will increase domestic investment in the stock market.
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