The Trainwreck

The picture above is an image an impending trainwreck. The picture plots the savings rate in the United States (produced by the Bureau of Economic Analysis). We can see that between 1959 and 1980 the savings rate was slowly rising from 7% to around 10%. However, beginning in 1980, the savings rate started on a new trajectory, falling from 10% to essentially zero. The last observation in the above picture is for the first quarter of 2008. In hindsight, this clearly looks like a bad situation. Nothing good can probably come out of negative savings. However, arguments were made, such as "Americans invest well," "Americans are actually getting wealthier from the return to their assets." As we will see next class, Americans were getting wealthier from the high return to their savings. However, a large part of the return to their assets was an illusion, the result of a bubble in asset prices. The trajectory of the fall in the savings rate was unsustainable. Negative savings for a country as a whole is most likely not good.

What happened? The next picture adds the last three quarters for 2008 and one observation for January 2009 (the latest release of the data from the BEA can be seen here).


We can clearly see that the trajectory for the savings rate was indeeed an impending trainwreck. We clearly see the collision. In the last seven months, the savings rate has gone from essentially zero to 5%. Whatever was the cause behind the falling savings rate, starting in 1980, is most likely the ultimate cause behind the current crisis.