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Source link: http://archive.mises.org/10495/what-is-the-condition-of-us-savings/

What Is the Condition of US Savings?

August 20, 2009 by

According to latest US government data, the personal saving rate jumped to 4.6% in June this year after settling at 0.4% in June last year.

According to the National Income and Product Accounts (NIPA), the saving rate is established as the ratio of personal saving to disposable income. Disposable income is defined as the summation of all personal money income, less tax and non-tax money payments to the government. Personal income includes wages and salaries, transfer payments, income from interest and dividends, and rental income.

Once we deduct personal monetary outlays from disposable money income, we get personal saving. Personal saving, then, is determined as a residual.

But is it valid to add all incomes in an economy in order to establish the so-called “national income?” Does the summation of money incomes equate with the true national income? Let us explore this point. FULL ARTICLE


Pravin August 20, 2009 at 8:33 am

This is true for Asian savings too. Both China and India have been running fiscal deficits for ages now. This money,thanks to the miracle of FRB has led to burgeoning bank deposits.- this is what they show as increased savings. It is a lie that the Asians are saving 30-50% of their incomes.It sounds so foolish to imagine poor people saving so much. It is inline with other OECD nations to be optimistic.

The world as a whole has saved less and has borrowed/stolen from the future a lot.

Pravin August 20, 2009 at 8:34 am

This is true for Asian savings too. Both China and India have been running fiscal deficits for ages now. This money,thanks to the miracle of FRB has led to burgeoning bank deposits.- this is what they show as increased savings. It is a lie that the Asians are saving 30-50% of their incomes.It sounds so foolish to imagine poor people saving so much. It is inline with other OECD nations to be optimistic.

The world as a whole has saved less and has borrowed/stolen from the future a lot.

bob August 20, 2009 at 10:01 am

I have often wondered about the methodology used to create the personal savings rate. This blog cleared a lot of things up for me. Thanks.

(8?» August 20, 2009 at 11:15 am

Great article. I’m currently reading Rothbard’s Man, Economy and State, and this article is an excellent summation of the role of savings and wealth.

One question though about the “savings rate,” where does the cost of debt service show up? From my perspective, middle-class people aren’t saving more, but have cut consumption in order to service their growing debt (as well as pay for the price inflation of the last several years). They still live paycheck to paycheck, but instead of TVs they are now paying for inflated groceries and the time they borrowed from Visa et al.

A. Viirlaid August 20, 2009 at 11:39 am

Beautiful article!

We are in real trouble, real soon.

What I don’t get is why the Federal Reserve and the Treasury Department don’t get it.

Aaron August 20, 2009 at 12:00 pm

I was confused by this article at first but after a little bit of thinking I think I understand it.

Did he say that it’s impossible to calculate the savings rate (as a % of income) because it’s impossible to calculate real income because it’s the sum of our production which is practically impossible to quantify?

Couldn’t they calculate the amount of savings not in % of income but in actual dollars and then convert the dollars to troy ounces of gold based on current market prices. Obviously the price of gold fluctuates and it wouldn’t really be able to show the real value of our savings in terms of purchasing power but I think it would still be useful.

Neil August 20, 2009 at 2:12 pm

I have been reading a lot of your Mises articles for awhile. I have a problem however in that I don’t understand two very key concepts.

Wealth generating activities and non-wealth generating activities.

I work in the steel industry where we transform a series of raw materials to produce another raw material requiring further processing to an end product. How does this fit into the categories you use? For that matter, how does power generation fit in to the scheme of things?

Another issue is real savings. I personally place part of my “income” – i.e. payment for services rendered, into a bank account to be used at a later date (it is the same as putting it under the mattress). This is not wealth generating as far as I understand. So what is real savings for an individual? I am also working hard to pay off my mortgage, so that I don’t spend more money than I need to do. i.e. the price I am willing to pay is not what the bank wants to sell it for. Is this wealth generation for me as an individual and not for the economy as a whole?

I have no formal economic education – just what I have read since I was an engineering student. Fortunately I was introduced to Mises and Rothbard and since finding the Mises organisation I have found an even larger group of interesting writers.

Thanking you in advance for your comments

Charles August 20, 2009 at 2:55 pm

Perhaps a country-wide personal saving could be calculated, relatively and roughly, by summarize all of bank deposits in the US, CDs, and investment accounts annually then compare the yearly change to determine if the saving is increasing or decreasing?

Since Austrian capital theory says a real saving comes from money deposed by individuals and entities in the banks, companies’ accounts, and investment accounts whereupon the general growth of economy will be fueled by these available capital [generally], a personal saving rate can be calculated thereof?

The data can be collected from FDIC, SIPC, brokerage houses, and banks [Yes, data collection under this fascist data-obsessed regime which I do not think would be possible in a free society.]

redshirt August 20, 2009 at 3:10 pm

I think I missed something in there… the baker trades loaves of bread for tools. The total production is the bread and the tools. Tools are consumed slowly; bread is consumed quickly– they are both consumables. Bread loses value quickly, the tools do not. Bread is in and out of the market quickly, while tools remain longer, but bread better represents savings?

Isn’t savings in terms of “money” different anyways? Money can be left to do nothing and its value will vary on the basis of economic processes, separate from overall physical processes (eating bread, using tools).

This article confuses me. I’ll look at it again when I have more time.

confused August 20, 2009 at 5:03 pm

I share redshirts confusion,an indiduals income-spending(I-Sp) per unit of time should be considered savings.Since the toolmaker sells tools and the baker bread one would have to calculate not only the loaves of bread but also the tools produced.And don’t forget the accountants service to calculate the taxes owed to the government!After all we don’t want to create money out of thin air!!

S Andrews August 20, 2009 at 7:25 pm

All of us are consumers, the reason why we produce is to consume – not to starve and die, but to sustain a good standard of living ( consumption ). So, in that sense, all that matters to us, in terms of our income ( ability to consume ), is the final consumption goods. A 1000 dollars saved under the mattress is useless, unless we could go out and find $1000 worth of consumption goods. In Prof. Shostak’s article – the consumption good was the Bread.

The production goods, or any investment in such, are not intended to produce current consumption goods, but future consumption goods. In that sense, in his example, the tools are not part of the current income – because a consumer can not consume tools to increase his current standard of living ( represented by his income ).

At all levels of production, the men/women involved are chasing higher levels of consumption. So, those who produce various production and consumption goods are always exchanging their production for consumption goods. Therefore, we don’t need to count intermediate goods in the income – in the example given, bread is being exchanged around, and consumed by people involved in various stages of production.

Andrew August 20, 2009 at 7:37 pm

Despite what is being reported on the personal savings rate, I imagine looking at the economy as a whole would be interesting. i.e. is Government saving more than offsetting the increase of personal savings and what is happening within the corporate sector?

Private_Freedom August 20, 2009 at 9:18 pm

Great article, although I would like to take issue with one point that was made.

Frank writes:

“Hence, the income that intermediary producers receive shouldn’t be counted as part of overall national income — the only relevant income here is that which is produced by the producers of final consumer goods.”

Are you not making it appear as though consumer spending in money pays the incomes in money for all intermediate producers, thus making your analysis pseudo-Keynesian after all?

Mr Economy September 30, 2010 at 12:15 am

To simplify the article, real savings is actually the stock of consumer goods and resources stockpiled or saved that allows people to engage in long term projects. For instance if the government created money and said to unemployed workers in an area we need a new high speed rail, a big portion of the unemployed would probably take the jobs. However, if there wasn’t a saved supply of consumer goods like food on the supermarket shelfs then workers wouldn’t really be able to focus on the project because they would need to spend their time gathering food first. So the supplies of unused consumer goods serves as real savings to sustain workers in long term projects.

The point being made with intermediate spending is that just because workers save money in the bank from services they performed like in buiding a machine, the amount of money thats listed in dollars saved doesn’t mean it counts the real supply of unused consumer goods or resources stockpiled. Yes money is supposed to be a receipt to claims on goods but if there is inflation and then the money is saved, the savings in dollar terms doesn’t tell us anything about what the total quantity of saved consumer goods are.

A. Viirlaid August 22, 2009 at 12:01 am

I don’t know if this will help.

At the beginning of the article by F.S. we hear of a baker that consumes 2 loaves and has 8 left over.

This all occurs on a little world, say an island, where the baker on a, say, daily basis bakes 10 loaves of bread.

What F.S. is saying is that if the bread is the ONLY “final” consumption good that all the people on this imaginary island CONSUME —- forget shelter, clothing, other food, water, and air… of course, those last few might even be free on this imaginary island —- then it does not make sense to include ANYTHING else in the calculation of Total Island Income.

Let’s say this island is at a temperature where no clothing is even needed. And let’s say our imaginary humans don’t need any other type of food — that this bread has all the vitamins and minerals these island people need for good health.

If Bread is what ultimately sustains Human Life on this little island, and all other activity either supports the production of this one good, or is of a different type, like say perhaps something ‘frivolous’ like grooming one another for fun, or swimming, or sleeping on the sand, then Production of Bread is what measures Total Income.

The ABILITY to Increase the DAILY Production of Bread is considered to be an increase in Total Wealth, because everything else is readily accessible to the islanders, who can drink, bathe, dance, sing, sleep, etc. for free. For simplification, let’s assume that these islanders don’t know HOW to increase Bread Production (for now). Or perhaps they don’t want to. Or perhaps they know that they will harm the delicate ecology of their island if they try to too aggressively ‘grow’ their Baking Industry.

If John the Baker on this island consumes 2 loaves and uses the rest to maintain his ability to produce 10 loaves a day — his equipment does tend to run down over time, and he does need flour and fuel with which to bake his Bread — then by counting the other 8 loaves TWICE (with which John acquires the fuel, and flour) the Total Income of the Island Nation is overstated. For sure, the income cannot be 18 loaves, or something even greater, because only 10 loaves are produced daily — or 3,500 loaves a year.

Why is this true? Because otherwise we are double-counting.

The ‘income’ of the other adults in the island population is not relevant, because they (in this simplified example) lounge around on the beach and/or produce flour and collect fuel and grow or gather the fruits of the land from which the flour is made. (Flour does not have to made only from wheat.)

Of course if there was a Jim the Baker who also baked bread the same way that John the Baker did, we would have to add Jim’s production of loaves of bread to the Total Income of the island.

And our example is very simplified. If there were other products that were consumed, like wine or milk, they would also have to be added to the Total Income.

But it is not necessary IMO for the article by F.S. to complicate matters by worrying about other items at this time.

But what we might wish to consider is that on this small imaginary island it is very EASY to isolate what the Total Income is, because there is only one Baker (John) and only one ‘final’ good.

In our own economy this is not true.
So what our statisticians do is add up ALL the income and thereby OVER- (double-triple-quadruple-etc.)-count it. They are perfectly aware that they are doing this.

That is arithmetically OK only so long as the statisticians in our own non-island complex society also double-triple-etc.-count all the outlays, at EACH level, for each good, whether it is for ‘consumption’ at the final level OR any intermediate producer level.

The imaginary islanders who create or gather other non-final goods (flour or ‘grain’ or fuel) also have personal income that they ‘net’ against their own outlays AND personal consumption.

If the fellow who gathers firewood gets 1 loaf a day for his trouble, and has no other outlays, we can say that his income is 1 loaf (or the money or gold equivalent — but here our unit of measure is loaves of bread). If he consumes that whole loaf, his savings are zero.

The fellow who comes in and maintains John’s ‘plant and equipment’ daily might be buying his ‘oven rocks’ from someone else who collects those specialized rocks or casts them from clay into bricks.

Those other people are all paid by loaves of bread that pass down through each of their hands. Of course bread gets consumed since that keeps everyone alive (we are ignoring other sources of protein like the possibility of catching fish, or growing other crops).

If the balance in this imaginary system is such that no one goes hungry and their is no surplus or wastage or saving, then what does the Total Income mean related to the concept of Saving?

Well IMO there would be no saving since everything produced daily is consumed daily.

Every person down the chain to the last who is directly or indirectly involved in contributing to Bread Production eats his or her bread and uses the leftovers to buy goods or services from those lower in this chain. And of course feeds their own other family members who might not even yet be contributing to current Bread Production, but might ‘just’ be attending school, or growing flowers for island ‘beautification’ or perhaps be creating other ‘works of art’ or singing or playing music.

Even the last person (the fuel gatherer or the grain grower) delivers his/her good or service and consumes the Bread Loaf received for such delivery (along with their ‘non-productive’ music-student family members, if they have any).

The Total Income should equal the Total Expense for savings to be zero, even if every level is counted — that is, even if we do count everything more than once.

A simplified example should prove this.

If John the Baker hands 8 loaves daily to the next persons down in the chain, and those persons declare 8 loaves as their ‘Total Income’ and if we add John’s ‘net’ Income of 2 loaves — he ‘consumed’ 2 loaves and used the rest as expense ‘money’ to receive goods and services that he needed to continue his daily activities — the Island’s Total Net Income is still only 10 loaves.

John’s surplus of 2 loaves was his income because that is all on a daily basis that was left over that he could consume. If he had made more ‘money’ on a daily basis he could have been seen somewhere, sometime, to be consuming more than just 2 loaves of daily bread.

If that next level ‘down’ from John is a family ‘business unit’ that does everything else that John needs for his Bakery business, and if that family-unit consumes the 8 loaves received for its goods and services, then its personal consumption is 8 loaves and its income is also 8 loaves. Its net income is the same as gross income because in this example it has no Bread (money) left over for outlays to any next level.

Savings are zero because in this scenario no bread was left over anywhere.

Let’s assume that John is not building up any real residual value in his business because he operates his business so primitively that he essentially has to rebuild it weekly.

Back to our own more complex society.

Where F.S. makes his most profound contribution IMO is when he writes in his article that

The total amount of money spent is driven [up] by increases in the supply of money. The more money that is created out of thin air, the more of it will be spent — and therefore, the greater the NIPA’s national income will measure (see Figure 2). Thus, an increase in the money supply on account of central bank policies and fractional-reserve banking makes the entire calculation of the total income even more questionable.

Since this money was created out of thin air, it is not backed by any real goods; income in terms of dollars cannot reflect the true income. In fact, the more a central bank pumps additional money into the economy, the more damage is inflicted on the real income. As a result, money income rises while real income shrinks.

How could an imaginary island ‘FED’ create ‘money’ on our imaginary island — well it could not create ‘real’ money, unless it knew how to bake bread. This assumes that someone is able to talk our imaginary islanders into voting to establish an imaginary Central Bank — let’s say that convincing orator was an imaginary islander named Ben Bernanke.

This example highlights the beauty of a money system that arises naturally, that is ‘created’ organically (sorry for the pun) within any society. So long as the society sticks with the economic system it has created with no outside interference (or by slight of hand by some hidden power) it will do better than by the ‘slight-of-hand’ approach of The FED, or any Central Bank.

If somehow an evil FED on our little island COULD create Bread Loaves artificially, it would create great harm.

People would be misled into thinking they were getting Bread but instead were getting Sawdust Fiber-Filler Phony Bread (SFFPB).

For a while the island folks might even continue to do their daily fuel collection etc., and other new people who could be fooled by this evil island FED’s phony SFFPB into gathering more fuel and daily harvesting even more of the plants from which the treasured flour was milled. More, as in ‘Beyond What Our Little Island Really Needs’.

A new Baker might even be fooled into setting up a new Bakery.

The island society for a while might have more Bread, but at what cost?

Certainly the island did not really need more Bread. It had just the right amount for its own good.

This new Baker (induced to start a business by the artificial stimulation from the new ‘FED’) might even put the old Baker (John) out of business, and some would say, well John was never really too efficient.

And maybe the island’s environment would also suffer as things were ‘artificially’ speeded up. The island economy would have been artificially ‘goosed’ by the island’s evil new FED.

In the end it might become clear to the islanders what was happening. They had been scammed. They had been tricked into destroying their own harmonious society, and they had destroyed their own capital — personal, societal, economical, and ecological.

They would soon kick the usurpers out. The evil FED would have to go.

So would the person who talked them into their little experiment with Central Banking.

On the other hand, it might not become clear where the harm was coming from. People would not be able to distinguish real bread from phony bread. As a result all bread would be diminished in value.

As a result even the bread maker, John, who made real bread, might choose voluntarily to give up his business because he could not get anyone to deliver the same amount of fuel and flour as he used to get for his labors and the bread he paid with.

John might decide to let the new usurpers try and supply the island’s bread because he would starve himself anyway as he tried to compete.
Without the 2 loaves of real bread on which his own personal (and his family’s) survival depended, he could only watch as his own body and the bodies of his family wasted away — that is the ultimate way personal capital gets destroyed.

A. Viirlaid August 22, 2009 at 12:31 am

For sure, the income cannot be 18 loaves, or something even greater, because only 10 loaves are produced daily — or 3,500 loaves a year.

Assuming our imaginary island only had 350 days in its imaginary year, the above quote would be correct.

But I actually meant to write “3,650 loaves a year”.

Sorry about that.

And yes to those of you who are confused, I have to admit that I was (am) too.

I accept the overall points about Central banks and the harm they do.

I accept that there might be problems in measuring real savings and that real savings can be diminished by artificial and egregiously large money-printing ‘binges’ by the FED.

I am not sure that the article really clearly explains how savings data as calculated are actually terribly wrong on the basis of the calculation.

For me the discussion of individuals not actually saving money “at no stage” rings a little hollow.

Certainly there is enough in the article to agree with. But there are odd asides that weaken the overall argument.

Certainly there are real wealth generators and mirage-wealth generators (the Central banks).

But for example the discussion about not being able to quantify the amount of total real savings was based on the wrong ‘fault’.
I don’t think that different goods have a problem being measured with the same unit of ‘money’.

Naturally if the central bank is playing around with that ‘unit’ so much that its value becomes a question, then of course there is going to be ‘difficulty’ measuring anything with that ‘unit’ — it’s like we are using a different unit of Fahrenheit each day to measure the real temperature and then compare the temperatures from one day to the next — it could not work.

But the comparison of TV-s to refrigerators or shirts — as a problem? That seems a little far-fetched IMO.

For sure I agree with the overall thrust of the article — but it could be worked on and much improved to be more effective.

All of the readers of Mises.Org know that government intervention is going to not help. And it will make things markedly worse.

That I think we can all agree on.

adi August 22, 2009 at 1:08 am

Hello all,

this article was unfortunately full of errors concerning national accounting. Its arithmetics concerning incomes were also fallacious.

If you calculate sum of all gross transactions in the economy then you will undoubtly get a very large figure, but that is reason why statisticians have created concepts which are already of net basis. Of course true flow of monetary transactions is greater than this figure of net basis.

Basic facts (really accounting identities):

Total supply = total demand

Gross output produced domestically + imported goods and services = domestic intermediate consumption + domestic net investments (acquisitions less disposals + change in the inventories) + domestic consumption expenditure + exports.


Value added + iMports = Consumption + net Investments + eXports.


GDP = C + I + ( X-M ), where GDP is value added


Income from production side = compensation of employees + consumption of fixed capital + operational surplus.

From production accounts (which cross-tabulate output of sector*industry) we get value added as a balancing item. Valued added is calculated generally as value of output – value of goods used in the production and destroyed in this process.
This is income generated by production.

If you calculate GDP + property incomes from rest of the world (ROW), net + compensation of employees, net from ROW then you get correct figure for national income.

Households also get transfers and this counts as part of their disposable income, but transfers are not part of incomes generated by production. Usually households pay more taxes than they get back as transfers….

I suggest that you should look figures about net investments in the economy. That would give more reliable picture. And which sector is making them. And what types of goods investments are composed of.

I think that increase in the personal saving is good thing if households can deleverage themselves so that they use positive savings to pay back debts. That will later allow more healthier economy.

National accountant and Austrian economist,


billwald August 23, 2009 at 5:34 pm

Money (cash) savings are deferred expenditures (deferred consumption)

Money is a conversion factor between the value of my labor and the value of my consumption of assets of all kinds.

Money is only functions as an asset to be used for future consumption or payment of debt, a number that exists in a computer or a paper IOU that is has the government as a cosigner.

jim ellis August 23, 2009 at 10:07 pm

One scorecard is the FX Reserves of a nation. From memory I believe that the USA has been growing about $10billion per year the last two years or so and is now about $81billion. However this has the physical gold valued at only $42.222 per troy ounce. When market price is more like $900 per ounce more than present book value. This I do not understand.

Jim Ellis August 23, 2009 at 10:11 pm

For better accuracy and understanding of FX Reserves of the USA see:


A. Viirlaid August 31, 2009 at 3:24 pm

I do agree with Frank Shostak about savings in one regard. That is, not everyone’s ‘deposits’ are REALLY Savings.

In the ‘old days’ people took their gold to a ‘bank’ — essentially a very secure warehouse for their precious-commodity-based ‘money’. This was because gold was difficult to protect and heavy to carry around.

These ‘depositors’ received a receipt for their gold. (This was also known as Paper Money.)

Others to whom they might pass on that receipt knew that they could reclaim the originally-deposited gold from that warehouse any time they wanted.

But some of these warehouses realized that they could lend out the gold to other people who needed to borrow money. These warehouses became ‘banks’ because they charged interest for the loan (of other people’s money) that they had lent out. Eventually these ‘banks’ also paid for deposits left with them. At first they charged the depositor because they did not yet have this other source of income, and maintaining secure warehouses with vaults was very expensive.

When that gold-money was deposited by those first-level borrowers into other warehouse-banks, those ‘banks’ — thinking that they were the original recipients of that depositer’s OWNED gold-money — again lent out that money to other people who desired to borrow. These second-level borrowers were getting money that was twice-removed from the very original ‘saver’ (depositor).

Thus was born FRC = Fractional Reserve Banking.

In the sense described above, FRC is, of course, a Ponzi Scheme.

It works and works phenomenally well, for a while.
That is, it works until it doesn’t.

It works because of the money-multiplier effect.
And it fails for the same reason.

When it fails, it fails because there is not the same amount of money (actual gold) in storage, as is the TOTAL amount of paper-receipts floating around in the economy.

Into this toxic environment, we introduce Central Banks, which are established to preserve some semblance of ‘stability’ in this by-nature Unstable System.

All I can say is Good Luck!

Today we have left gold behind us as a ‘Barbaric Relic’. This is to our mutual loss, although not readily acknowledged as such.

Central Banks do damage today by further, artificially, pumping up the Money Supply already pumped-up by the FRCS (Fractional Reserve Banking System).

It can only end badly. And it almost always does, roughly once each generation or two. All it takes is for the current generation to grow up during good times, to forget the risks associated with borrowing.

These borrowing risks manifest in deadly fashion only after such a period of time because the loans are never really called upon to be paid back until ‘times get bad’.

And ‘Times Get Bad’ when the Economic System can no longer productively absorb More Debt. This always happens, sooner or later, because the Amount of Total Debt exceeds that magic inflection point, the Total Ability of Society to Effectively Service the Level of Total Debt.

That is, if each new dollar of Loaned Money creates Less Than One Dollar’s Worth of Productive Output, the system careens toward Collapse.

We are in that situation today IMHO.

Market Rebound? Economic Recovery? Keep Dreaming!

Our Island Nation of Bread Bakers has ‘saved’ its way into debt-default and poverty. Our ability to again get back to Good Times can only be achieved when we can service our Total Debt effectively. And, barring some Gift from God like Free Energy from Cold Fusion, the only way to get back to effectively servicing our debt, is to reduce it, relative to our ability to create output with which to feed that Debt Monster. And He’s ravenous!

ryce01 May 4, 2010 at 6:27 am

I like this word.
Top Savings Plan

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