Why Individuals and Nations Save

• Individuals save for
  • Funding future costs
  • Protect against economic emergencies
  • Leave money to family
• Nations save for
  • Producing new capital goods to promote higher living standards in future
  • National savings is savings by households, businesses, and governments

Savings and Wealth

• Savings is a flow; it’s a measure defined per unit time i.e. saving $50/week
• Wealth is a stock; a measure of an amount at a single point in time i.e. wealth was $50k on Jan. 1, 2020
• Flow of savings directly impacts the stock of wealth
• Change in wealth = saving + capital gains - capital losses

How Americans Increased Wealth While Saving So Little (1990s-2000s)

• Stock ownership increased in 1990s (direct, mutual funds, pension/retirement)
• Stock prices rose quickly
• Stock market declined 2000-2002

Why Chinese Save

Savings Rates Example

The following is a simple example for two identical families other than their savings rate:

The income for each family is $40,000 each year, and is rising due some of the income being saved and earning compound interest. Computing incomes for each family at $t$ years in the future looks as follows:

• $Y_S(t) = X(1+0.05r)^t = 40000(1+0.004)^t$
• $Y_T(t) = X(1+0.2r)^t = 40000(1+0.016)^t$

Note that the actual rate being computed on the principle is not just the interest rate, but that rate applied to the savings rate (since the entire $40,000 “principle” is not all earning interest, only the percentage saved). And this rate of saving is applied across multiple years i.e. the absolute amount saved each year increases as each family’s income increases due to the interest accrued on savings.

Why Americans Save So Little

Potential reasons include

• Social security, medicare, other govt. programs
• Mortgages with low down payment
• Confidence in good future
• Increasing stock and real estate value
• Readily available home equity loans
• Status goods, demonstration effects

Is Low Household Saving a Problem?

Not necessarily a problem from a macro perspective, but it is from a micro perspective.

• Low household savings rate could be problem with growing wealth inequality in US

• Savings patterns can increase inequality, rich families save more and get richer, poor save little and get less (a Mattewsism)

• Private saving = $S_\text{private} = Y - T - C$, GDP ($Y$) without taxes ($T$) and after removing consumptions ($C$), this is naturally the amount left and is saved by

Investment and Capital Formation

Investment Decision

• Two important costs
  • Asset price of capital good
  • Real interest rates (flow cost of investment)
• Value of marginal product of capital $\text{VMP}_K$

Saving and Real Interest Rate

• Saving money implies giving up current consumption for future gains i.e greater future consumption

Crowding Out

• Tendency of govt budget deficits to reduce investment spending, all else remaining equal