I was looking at national savings figures for the United States when the Australian National Accounts came out yesterday, which is why I belatedly noticed the negative households savings figure.
The US has also experienced a big decline in household savings, but they remain positive at around 3 per cent of GDP. Retained corporate earnings are between 0 and 2 per cent of GDP depending on how you measure depreciation. These small positive contributions are wiped out by the government budget deficit (around 5 per cent for the Federal government – the states are also in deficit, but I don’t have a number yet). More on all this is available from the Bureau of Economic Analysis.
One interpretation of all this is that people from outside the US (and, for that matter) Australia, are eager to buy US assets, and Americans are simply cashing in the consumption benefits. I don’t agree. A steady decline in household savings seems to be occurring wherever financial markets have been liberalised. At the moment, the whole system is being kept in balance by massive purchases of US dollars by Asian central banks, but this can’t continue indefinitely.
It’s therefore time to invoke Stein’s Law – if a process can’t continue indefinitely, it won’t. There seems no prospect of an exogenous shift in the behavior of households or of a return to fiscal probity by the US government. I conclude that a return to equilibrium must involve an increase in real and nominal interest rates, probably facilitated by inflation. Even allowing for an inflationary cushion, this will not be a pleasant process for heavily indebted Australian households. American householders are protected by the structure of mortgage contracts, which allows them to lock in low rates, but the costs will be borne elsewhere in the financial system.
John Quiggin 
Your link to http://www.bea.gov is broken.
Could it be a lagged effect of people waking up to the fact to gain substantial assets you have to borrow substantially and households finally becoming comfortable with leverage?
Now that I am experiencing more than a few twinges of buyer’s remorse over GW II, it is nice for Pr Q to change the subject to our favourite socio-economic topic: “we’ll all be rooned”
Is this really just an aggregate observation of what we know to be true for individuals ie that it is the most wealthy in our society who are the most indebted. Also there is the demographic aspect. When I was a young man I could fit my possessions into the back of an FB Holden (with racing motorcycle and trailer behind) Now I didn’t have a cracker by next pay-day but I certainly had no debt. By the time I couldn’t fit the family’s possessions into a Pan-tech, coupled with equity in a family home and business, I had more debt than any single young man could have imagined.
So, is the Savings Ratio of aging, developed countries simply to be expected and indeed observed?
The savings figures include purchase of assets like homes and businesses, not just financial assets, since they are derived from the difference between income and consumption expenditure. So, if you are paying off your house you are saving.
The measures don’t include capital gains, which is sometimes problematic and sometimes not.
John,
I must confess my recall of some of the details of measures of economic health like Savings Ratios is getting a little fuzzy now. Perhaps you might like to post on how this measure is collected and some of the problems in measurement?
More generally your recent posts have me thinking around the behaviour of ‘investing’ in general. Leaving aside human and social capital investment for the moment, the notion that a society can choose to radically alter the way it invests its savings in means of production, or simply stores of wealth is an intriguing one. At any time society can have a major switch away from investment in productive assets, into anything as fanciful as Tulips, Poseidon scrip or Sydney RE. Small shifts in demand may produce dramatic price shifts with restricted supply. This can be exacerbated, or perhaps even initiated, by foreigners doing likewise with those same assets.
A similar effect can apply with consumption. eg. A large shift to wanting to drink bottled water instead of tap water, will result in a jump in measured consumption expenditure and hence GDP with no change in (human)consumption of water, although presumably much more happiness due to the ‘extra utility.’ Large behavioural shifts can cause large changes in measured consumption, investment and savings. Do these behavioural changes make redundant traditional economic measures, in much the same way as a CPI basket measuring prices of VCRs rather than DVDs becomes redundant? Is there any reason, outside of a serious recession, that the bottom will fall out of the bottled water market or RE market?