Personal savings drop to a 73-year low

There is not much more to say about this story, except that we are no longer a nation of savers. From MSNBC News:

WASHINGTON - People are saving at the lowest level since the Great Depression, and that could be a problem for the millions of baby boomers getting ready to retire.

In fact, the Commerce Department reported Thursday that the nation’s personal savings rate for all of 2006 was a negative 1 percent, the worst showing in 73 years.

The negative rate means people are spending all of the money they have left after paying taxes — and then some. They are dipping into savings or increasing their borrowing to finance current spending.

Graph showing personal income and personal spending rates. From MSNBC.

It’s no surprise to Nancy Harvin, 44, of Washington. “I struggle with saving myself,” she said in an interview. “I think we are consumer-driven. We have to have things.”

Scott Cooke, 48, said he was starting an interior design business in the Washington area and didn’t have the resources to save.

“I’m living from check to check,” he said.

It should be no surprise that we're living from paycheck to paycheck. I will say that the big reason for this change in the negative savings rate has been that Americans' primary investment has been in their homes. Americans have been investing in their homes, and watching their equity, and home prices rapidly rise. According to MSNBC News:

The 1 percent negative savings rate in 2006 followed a 0.4 percent negative rate in 2005. There have been only four years in history that the savings rate has fallen into negative territory. The other two were 1932 and 1933 during the Great Depression.

During the Depression, when as many as one in four people were out of work, households were exhausting savings in order to pay the rent and buy food.

Last year’s negative rate was attributed not to a lack of jobs but to good economic developments — including low interest rates that made it attractive to borrow money to make purchases and also to refinance home loans.

While the Federal Reserve was raising interest rates for part of last year, those increases followed an extended period when the Fed had driven rates down to the lowest levels in more than four decades.

Low interest rates helped to fuel a boom in housing purchases, which in turn helped to drive home prices higher. That led to a surge in mortgage refinancings with people using their higher home values to get money to spend on other things.

Refinancings gave homeowners an additional $900 billion to spend last year, a big factor in driving the savings rate lower.

The combination of low interest rates, and the rising home prices, created this feel-good bubble for Americans into taking out their equity from their homes for spending. And even more Americans jumped into the housing market with the low interest and subprime loans, believing that housing prices would continue to rise. But now the housing bubble has collapsed, and I'm wondering how many more of these same Americans, who are seeing their housing investment plunge, are starting to dip into their savings just to get by, rather than get ahead.

Of course, the rich are dipping into their savings because they are doing so well:

Another factor at work is the rising income inequality in the country. The rich, who traditionally save the most, don’t feel the need to save as much any more because their net worth has been soaring with fatter paychecks for those at the upper levels of the income scale. They have also benefited from a rebounding stock market.

“Wealthy individuals have become very wealthy and they now have a larger nest egg and therefore they are spending more of their current income than they have historically,” said Mark Zandi, chief economist at Moody’s Economy.com.

What else is new?