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Your World in Charts: Debtor Nation

This comes via Federal Reserve Bank of San Francisco economists Reuven Glick and Kevin Lansing's excitedly named paper, "U.S. Household Deleveraging and Future Consumption Growth."

householddebt.jpg

Not good. The authors estimate that getting our debt-to-income ratio down to a more sustainable 100 percent would require the household saving rate to rise from about 4 percent currently to 10 percent by the end of 2018. This would, in turn, slow economic growth by a bit less than one percentage point per year. I say again, not good.

(Via James Hamilton.)

By Ezra Klein  |  May 29, 2009; 2:00 PM ET
Categories:  Charts and Graphs , Economic Policy  
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Comments

The higher savings rate won't occur in a vacuum. A higher domestic savings rate will lead to greater investment. Also, the dollar bubble of the late 90s and early 2000s lead to large trade deficits that sucked about 1% off of GDP annually in recent years. Trade is now contributing to economic growth.

The transition period may be bumpy, but I don't believe that reduced consumption and more savings will reduce NET growth by 1% all the way until 2018. The makeup of growth will be different, but I view that as a good thing. Growth will be more balanced and sustainable.

Posted by: SteveCA1 | May 29, 2009 2:23 PM | Report abuse

Note that we can not get our savings rate up to 10% unless we make serious headway on our structural current account balance and gain a substantial increase on the lackluster investment in productive capacity of the past decade.

Savings is, after all, equal to:
(investment + debt financed consumption)
plus the budget deficit
plus the trade surplus

... and debt financed consumption was already unsustainably high, so that will be substantially lower than the previous decade. Without real investment to counterbalance the drop in debt financed consumption, and a substantial slice in our current account deficit, the public debt will continue to have to flow overseas rather than be able to be held inside the US as savings.

Posted by: BruceMcF | May 29, 2009 2:42 PM | Report abuse

Are there any projections for what would happen if we adopted a VAT and bolstered redistributive social programs that are proven to benefit long-term economic growth?

Would the VAT initially have a negative impact on savings if it were not paired with social spending?

recent newsworthiness (http://www.washingtonpost.com/wp-dyn/content/article/2009/05/26/AR2009052602909.html)

Posted by: amorsenh | May 29, 2009 3:01 PM | Report abuse

Good, I say. We need real growth, based on exports. Household debt will also continue to fall, in aggregate, as homeowners continue to default on mortgages, and home prices for new buyers decline, decreasing the amount of debt needed to finance them. We borrowed a lot of money, now we have to work to pay it back.

Posted by: staticvars | May 30, 2009 10:12 PM | Report abuse

One whole effing percent on national growth? Even with compounding, that would take most or all of the period just to match the debacle of 2007-2010. If getting the savings rate back to sane levels would prevent a repeat of this mess in another 20 years, it makes sense even without the "right thing to do" argument.

Posted by: paul314 | June 1, 2009 12:52 PM | Report abuse

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