Increase in Savings Rate Explained

Fortune Magazine just published an article bemoaning the lack of consumer spending and (what is to the author) a paradox of increasing savings rates. Mr. Colvin, the author, apparently does not get out much, because anyone with eyes to see can tell you why savings rates are increasing.

People are 'saving' only because they are paying off their debts. They are not paying off their debts because they want to, but because they can no longer refinance their debts with home equity loans, low-rate promotional cash advances, or even just plain juggling their balances between credit lines. Banks are relentlessly cutting lending. Credit lines are cut and new loans are harder to get. In order to pay off their debts, people must cut their spending on whatever they would have bought if they didn't have to pay off their debts. Consumption declines, 'savings' increases, end of story.

The dimness represented here by Mr. Colvin and other writers in the leading financial publications is disconcerting. If the investing class continues to be as misinformed in the Depression as it was during the Mania beforehand, recovery will be very far off indeed.