Whether interest rates do rise will also depend on how US saving and investment evolves over the same period. America s household saving rate has risen since 2007 by about 3 of GDP.

Another indication of the role of wealth in fueling higher consumer spending is the decline in the household saving rate. Total household saving as a percentage of disposable income fell from about 6 in 2011 and 2012 to just 3.8 in the most recent quarter.

America s net national saving rate the sum total of household, business, and government saving (adjusted for the depreciation of aging capacity) currently stands at 2.5 of national income. While that is better than the negative saving rates of 2008 2011, it remains well short of the 6.3 average of the final three decades of the twentieth century.

Consumer spending in China now accounts for just 36 of GDP, about half the consumption share of GDP in the United States and Western Europe. This remarkably low level reflects both the small share of household income in total GDP and the high rate of household saving.

With a high household savings rate of around 30 of disposable income, per capita disposable income amounts to roughly half of per capita GDP. Expanded social security programs and a richer menu of saving and investment options could go a long way toward reducing precautionary saving and boosting consumption.

China s gross saving rate (the percentage of GDP that is not consumed immediately), which includes both public and private saving, is around 50 . By contrast, the saving rate in the United States is the lowest of any major country roughly 10 of GDP.

China faces a similar demographic trend, and also a push to unleash household consumption in order to sustain GDP growth. As in Japan, the downward trend in China s saving rate will show up in its current account.

Will a sharp dollar depreciation cause exports to rise and imports to fall? Will a rapid rise in the inflation rate reduce the real value of government, household, and commercial debt, leading to lower saving and more spending?

The United States has no compulsory saving plan, and it has an abysmally low in fact, negative personal saving rate. But the government is loath to consider a mandatory saving plan.

The difference between Chinese and US saving rates has been growing for decades. In the early 1980 s, China s saving rate was twice as high.

With a savings rate of barely 4 of GDP, the average US household is unlikely to be over saving. Sensible policy lies in improving the capabilities of the workforce across the country, so that they can get sustainable jobs with steady incomes.

America s massive trade deficit is a direct consequence of an unprecedented shortfall of domestic saving. The broadest and most meaningful measure of a country s saving capacity is what economists call the net national saving rate the combined saving of individuals, businesses, and the government.

The future reduction in China s saving will therefore mean a reduction in China s current account surplus and thus in its ability to lend to the US and other countries. If the new emphasis on increased consumption shrank China s saving rate by 5 of its GDP, it would still have the world s highest saving rate.

Reducing the share of income that Chinese households save could also raise consumer spending faster and more easily. The high rate of household saving in China reflects many factors, including the risk of job loss and the lack of a reliable government pension program.

And it has just retired 850,000 inefficient household refrigerators in favor of modern, energy efficient models, with millions more earmarked over the coming years. Mexican homeowners who install energy saving systems such as solar water heaters are becoming eligible for lower rate green mortgages.

Despite their declining incomes, households raised their spending in early 2012 at a rapid pace by cutting their saving rate to just 3.7 . Without further declines in the saving rate from this very low level, consumer spending will not continue to grow as robustly.

The broadest and most meaningful measure of a country s saving capacity is what economists call the net national saving rate the combined saving of individuals, businesses, and the government. It is measured in net terms to strip out the depreciation associated with aging or obsolescent capacity.

Since 1955, Singapore has taken a direct approach a compulsory national saving plan, which generates very high saving rates. The contribution rate for the Central Provident Fund is now 34.5 for people with higher incomes.

But the surplus has fallen sharply in the past five years, from roughly 6 of GDP in 2007 to only 1 now. With a falling rate of household saving and the prospect of new fiscal deficits, the current account will soon be negative, forcing Japan to sell its debt to foreign buyers.

As he moves his savings rate down, it means that he's saving zero when it's all the way here at the left.

Thus, by encouraging the purchase of health insurance by individuals or employers, the Chinese government could reduce significantly the overall household saving rate. Individuals who have such insurance would be better off, because they would not face the risk of large medical bills and would be able to spend more on other forms of consumption.

Consumption, which accounts for about 70 of total spending, is constrained by high unemployment, weak wage gains, and a steep decline in home values and consumer wealth. The uptick in consumption in the last months of 2011 was financed by a decline in the household saving rate and a large increase in consumer credit.

Saving Greece, Saving Europe

Saving France, Saving Europe

America provided China with both stability and growth anchors. China enabled the US to sidestep the mounting perils of subpar saving, reckless fiscal policy, and weak household income growth.

For many years, the US has lived beyond its means a household saving rate close to zero and investment financed solely with foreign funds. The US current account deficit, which is identical to net capital imports, grew steadily to an annual 811 billion in 2006, or 6 of GDP by far the largest since the Great Depression.

Compared to countries with very slow growth rates, countries with reasonably high growth rates should borrow. But when a country s growth rate continues to increase, its saving rate would increase faster than its investment rate, so it is more likely to run a current account surplus.

China currently saves and invests half of its GDP, but, as its workforce shrinks in the coming years, its investment rate is likely to fall sharply. However, aging will keep the saving rate from falling at the same pace.

Unless and until the US faces up to its chronic aversion to saving namely, by reducing massive federal budget deficits and encouraging the rebuilding of severely depleted household saving multilateral trade deficits will persist. Simple arithmetic and basic economics tell us that a multilateral problem cannot be addressed by a bilateral solution.

Indeed, while China s new stimulus plan overwhelmingly emphasizes infrastructure, it gives short shrift to social programs, such as health care and education, even though they can reduce household saving pressure and increase private consumption.

Finally, the entry of women into economic life has a further positive impact, namely the increase of household income thus favouring demand and consumption of goods and services, as well as saving and investment.

The net national saving rate (businesses, households, and the government combined) stood at just 2.9 of national income in mid 2015, less than half the 6.3 average over the final three decades of the twentieth century. As China shifts from surplus saving to saving absorption using its surpluses to build a safety net for the Chinese people rather than subsidize the savings of Americans a saving short US will find it tough to fill the void.

We think about saving. We know we should be saving.

And he was wont to command his household to the Prayer and the poor rate, and he was with his Lord an approved one. Chapter 19

And he was wont to command his household to the Prayer and the poor rate, and he was with his Lord an approved one. Chapter 19

Household debt stood at 112 of income in the third quarter of 2012 down from record highs in 2006, but still nearly 40 percentage points above the 75 norm of the last three decades of the twentieth century. Similarly, the personal saving rate, at just 3.5 in the four months ending in November 2012, was less than half the 7.9 average of 1970 99.

Prosperity has been relatively widely shared. Median household income has grown at an average annual rate above 3 in the last decades almost twice the OECD average.

Since the fourth quarter of 2008, America s net national saving rate has been negative in sharp contrast to the 6.4 of GDP averaged over the last three decades of the twentieth century. Never before in modern history has the world s leading economic power experienced a saving shortfall of such epic proportions.

Saving clause

China s high and rising urban saving rate in a climate of vigorous per capita income growth reflects a persistent preference for precautionary saving over discretionary consumption. Unfortunately, this is a rational response to the uncertain future faced by the majority of Chinese families, underscored by the lack of a reliable social safety net.

All of this will mean a reduction in national saving and an increase in spending by households and the Chinese government. China now has the world s highest saving rate, probably close to 50 of its GDP, which is important both at home and globally, because it drives the country s current account surplus.

Differences in saving rates matter a lot, and must be a major reason that China s annual economic growth rate is now a full six percentage points higher than in the US. If people are saving half their income, their investments in capital have the potential to propel the economy at a rapid pace.

However, aging will keep the saving rate from falling at the same pace. This differential will generate large external surpluses that will transform China from the world s factory into the world s investor.

The Chinese government recently modified the tax law to exclude employers contributions to employee pension plans from taxable income and to allow the funds in those plans to accumulate tax free. This tax favored employee saving plan is a good substitute for more comprehensive social security pensions, but it has had the undesirable effect of increasing household saving, rather than increasing consumer spending.

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