Monetary Savings Versus Real Savings


According to the National Income and Product Accounts (NIPA) the US personal savings rate stood at 13.6 percent in February 2021 against 8.3 percent in February 2020. Since consumption expenditure is considered as the driving force of the economy, obviously a strengthening in savings, which implies less spending, cannot be good for economic activity, so it is held. Conversely, a decline in savings, which is an increase in spending is considered as good news for economic activity.

The NIPA framework is based on the view that spending by one individual becomes part of the earnings of another individual. The spending of the purchaser is the income of the seller, or we can say that spending equals income.

Therefore, if people maintain their spending, this keeps overall income going. An increase in savings is regarded by popular economics as less expenditure on consumption.

In the NIPA, the saving rate is established as the ratio of personal saving to disposable income. Disposable income is defined as the summation of all personal money income less tax and nontax payments to government. Personal income includes wages and salaries, transfer payments less social insurance, income from interest and dividends, and net rental income. Once we deduct personal monetary outlays from disposable money income, we get the personal saving.1

Now, a change in the supply of money affects the total amount of money spent. Consequently, the greater the expansion in money supply, the more money will be spent, all other things being equal, and therefore the greater the NIPA’s national income is going to be. It will also result in an increase in personal savings. Thus, it should not be surprising that the personal savings rate closely resembles the momentum of the money supply (see chart). By this framework, the US central bank can exercise control over individuals' spending and hence economic growth.


On this, April 2021 research from the Federal Reserve Bank of New York says, “The additional U.S. fiscal package passed in December boosted household incomes and savings starting in January, and the much larger package passed in March will add even more.”2

Furthermore, according to the research, “[h]ow freely households spend out of their newly accumulated savings will be a key factor determining the strength of economic recoveries. Consumer spending would soar if households run down these funds aggressively when economies reopen.”3

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