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Joel Naroff, president and chief economist of Naroff Economics Advisors Inc., in Holland, Pa.

Is negative savings rate a problem?
Joel Naroff, economist, Holland, Pa.

Joel Naroff, president and chief economist of Naroff Economics Advisors Inc., in Holland, Pa., addresses the question: Is negative savings a problem?

"The savings rate is the difference between income and spending. It's a residual; it's what's left over. It's also a flow. On a monthly basis it looks at how much people earn from all income sources versus how much they spend.

"The problem is I make a killing in the stock market and I sell some shares. The money I get from selling isn't income, it's wealth. I didn't earn it; I got it through my investments. If I spend that wealth, instead of having $10,000 in stock I have $5,000. That means I have spent some of my wealth, not income. It's wealth I'm drawing down. It goes into spending but not income. That's a key factor.

"Economists call it the wealth effect. As my wealth grows I tend to spend more. So to some extent the savings rate is a number that you have to be careful about when you use the word 'negative.' It is a negative -- I spend every penny and I draw down on some of my wealth. But I created some of that wealth and it's not necessarily good, bad or indifferent that I spend it. It's tied to how I view the future. If I make a half-million dollars selling my house and I take out $50,000, big deal.

"To some extent we're spending way beyond our means. We're drawing down on wealth that has come from equities or, more importantly, our homes. Economists worry because we've gone through an environment where housing prices have soared, and we've spent a lot of the wealth that was generated.

"The probability that over the next three years we'll see that same increase in property values is pretty low, and there's the possibility that prices will fall. What that says to economists is that the probability that we'll draw that kind of money from equity again is small. If we spend a lot of the wealth and we don't have that money going forward, consumer spending slows and the economy slows."

Negative personal savings
Just how serious a problem is the negative savings rate? Click on each expert's name to view his answer.
Is negative savings a problem?
Joel Naroff, president and chief economist, Naroff Economics Advisors Inc., Holland, Pa.
John Merrill, investment manager and founder, Tanglewood Capital Management, Houston
Tony Proctor, certified financial planner and president, Proctor Financial, Wellesley, Mass.'s corrections policy
-- Posted: March 8, 2006
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