What Would Happen if Everyone Saved 10% of Their Income

Back in 2005 I asked the question, “What would happen if everyone saved 10% of their income?“.  What a difference a couple years makes.  My original theory was that our economy would falter significantly.  Here’s what I said back then:

My take on this is that, if everyone was consuming 10% less, our economy would head south. Our economy is based on growth, and if everyone stopped consuming 10% as much as they do today, we’d probably see a recession. Of course, I don’t REALLY know what I’m talking about, but that’s my theory. My general theory is that, for all of us that are already investing and saving, it would be a bad thing for everyone else to do it too.

Any economics PROs out there want to pipe in?

Here are a few industries that I think would feel an impact of all this saving:

-Credit card industry (negative)
-Payday loan companies (negative)
-Retail businesses (negative)
-Investment firms (positive)
-Banks (negative? Who would they loan all those deposits to?)

I’m sure there are a ton more.

My basic point of view then was that decreasing spending at the consumer level and increasing savings would be a bad thing for all of the people that were already savers.  Fast forward to today and I think it’s pretty evident that the decrease in spending at the consumer level (driven by fear and lost wages) has impacted all of us.  Without a doubt, the credit crisis and failure of major institutions has been a horrible thing, but that has driven so much fear in to consumers that we are seeing the result of a major pullback in spending and a drastic shift to saving.  Sure there are those that aren’t spending because they have lost their source of income but there are many millions more who are simply turning off the consumption spigot.

A commenter named Khyron left very detailed comments back in 2005.  His basic point of view was that saving would be good for the overall economy.  He believed that an increase in savings would fuel growth in the available capital from banks and  create many new opportunities for lending to businesses etc.  With the current climate, I think we might get to test that theory.  From what I’ve read, the savings rate is trending back up.  I know from personal experience that I’m saving even more than I did before.  As we all know, companies are scrambling to shore up their businesses.  With all of the capital market issues, companies can’t secure enough credit to even operate (in the most extreme cases).  Other companies are having to drastically cut employment and other costs to try to maintain profitability due to lower sales volumes.

The one positive thing that I think all of this reduction in spending has done for us savers is to create buying opportunities in the stock market, as well as the real estate market. As soon as someone figures out which companies are the best value to buy, please let me know.