Capstone Project Paper

Posted: August 15th, 2013

Personal Savings Rate: Worse than we Thought


The article discusses the saving trends noted in the American economy since the 1970s. Jones notes that, the amount of savings have declined drastically from the 5-7 percent range to stand currently at 1-3 percent (Jones, 2010). These statistical figures have been computed as proportions of the Gross Domestic Product (GDP). The ongoing debate related to the case constitutes a dual relationship with one side arguing that saving rates do not constitute to an economic concern while the other group maintains that it is a serious economic subject. Savings is the proportion of disposable individual earnings that are not spent on consumption and taxes. Mortgages are not considered as overheads in the computation of savings and this has acted as a point of disputation for some economists that believe it is an expense. Those that reject the inclusion of mortgages as an expense hold the view that the costs incurred in form of mortgages are accounted by the value increment and therefore the costs become savings. One of the reasons identified for the decline on savings is the low return afforded to savings. Low savings pose a major economic risk as it enhances American dependence on foreign capital.


The federal government, or rather all forms of governments, majorly depend on the public funds mopped up through taxation programs to finance state projects. The same finances are used for remuneration purposes to civil servants. Generally, state budgets tend to be higher than the allocated monetary amount in form of revenue and this leads to the creation of a deficit. To overcome the deficit created, the government resorts to borrowing practices, mainly from foreign sources to supplement the shortage created. Gupta (2001) refers to this practice as deficit financing, which is “a deliberately created gap between public revenue and public expenditure…to bring borrowing… that results in…aggregate expenditure…of additional money supply,” (p. 356). The inference therefore implied by this argument is that, when the government acquires ten percent of the total budget allocations from the public, then the remaining ninety percent has to be financed as a deficit.

In 2009, the American economy recorded a negative percentage after a period of forty-seven years and the trend will possibly continue in the subsequent periods unless saving patterns are reversed in the country. The costs attached to foreign capital tend to increase with the amount of finances acquired and this makes the cost of capital to be expensive. Jones (2010) notes that the saving patterns will move from bad to worse due to the demographic figures that project that within the next fifteen years, eighteen percent of Americans will be aged at sixty-five years or more. Consequently, their saving ability will be greatly reduced. Americas current government spending stands at ten percent of its GDP. If the economy continues to accrue negative percentages from the public, then the government will be forced to borrow more from foreigners and the risks attached to this be multiplied dramatically.


Savings are viewed as economic monetary bases required for the maintenance of economic continuity (Pearce & Barbier, 2000). Borrowed funds work best if invested since this leads to the earning of additional resources that are then used to finance back the former debt. Loans that are employed to finance consumption have a higher cost as accounted by both monetary and opportunity costs attached to the use. Drastic measures are required to ensure that the American saving rates are enhanced. This can be achieved by such measures as increased taxes, enhanced economic expansion and higher saving rates. Although most consumers may not agree with the proposed techniques to increase the amount of revenue for government spending, the choice largely lies with the public to forego comfort for the sake of the future or be prepared to pay the cost related to higher foreign borrowing, which is relatively higher.





















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