Over the past few years, much ado has been made about the dangers of a consumer-driven economy, the dangers of the horrible personal savings rate, and the dangers of the amount of personal debt in the United States. Cheap credit and federal mandates to lenders have fueled the debt explosion and discouraged savings. More than one financial experts have rightly noted that Americans don't save, they buy houses. Our GDP is driven, not by how much we sell, but how much we buy. It hurts our sustainability, and it increases our trade deficit, and it transfers wealth to other countries.
Americans have wised up. They have seen the folly of tying up most of their net worth in a house that they can enjoy, but never realize the return. Many are even rejecting cheap consumer credit. Savings rates have went through the roof. According to the Department of Commerce, personal savings rates have risen from -1% in the 3rd Quarter of 2005 to 3% in the 2nd Quarter of 2008. Rumors are that the savings rate in the 3rd Quarter of 2008, which ends today, are 7%.
This really hurts the big banks that are most exposed. Big businesses put their deposits in big banks and get their credit from big banks, but individuals and small businesses put a disproportionate amount of their savings in small banks and credit unions, while they also get their credit from big banks. People are spending less and saving more in small banks and credit unions, and consumer-driven big businesses are depositing less in big banks. So big banks, who have the most credit out and most bad credit out are getting fewer deposits, while small regional banks who were already less exposed are getting more deposits. If big banks continue to fail, small banks stand to benefit even more.
So if people are saving and not spending, what's going to happen to that money? It's going to be turned into loans, and much of it for producers. Manufacturing has been building for several years, and those projects are starting to produce. Existing small companies and entrepreneurs can borrow from the well-positioned small banks and credit unions to produce products or provide services to those producers. And if personal savings continue at these rates, that means more products available for exports, which will reduce our trade deficit, maybe convert it into a surplus, and make the country more sustainable.
This conversion to a producing economy will be painful to those who benefit most from a consumer-driven economy, especially lenders, but it is inevitable. It will hurt many on Wall Street, and many of those about to retire who are heavily investment in stock. Any bailout will just prop up companies with an outdated business model, and delay or prolong the crash. The good news is that once this crash is over with, new economy that we emerge with will be better than the one we left behind. Those of us who are young enough to benefit have exciting times ahead.
Disclaimer: I'm no economist, and these are just my observations. If they are wrong, I blame ignorance.