Financial Literacy - How to Prosper
savings
How the economy affects your pocketbook

"For a generation we've seen that the increase in living standards have been pretty modest and a widening of the income distribution so that the overall ability of the economy to benefit people at the bottom end of the income distribution seems to have been largely lost in the past 20 years," says Rodriguez.

The reason for stagnating incomes? Rodriguez cites global competition for jobs requiring the most easily replicable skills and a strong correlation between flat income levels and education levels. But those at the high end of the income and education spectrums are making headway.

"At the same time we've seen that the global economy allows one to leverage their skills if they're at the high end, so the people with the most skill acquisition and highest education level have been able to really benefit from the huge scale of a more open global economy," he says.

Inflation

Inflation refers to the price of goods increasing. It can also indicate that there is too much money floating around.

A common measure of inflation as it impacts consumers is the consumer price index, or CPI. The CPI gauges the cost of a basket of common items consumers purchase.

"When you have inflation and your dollar loses its purchasing power, you lose value in that dollar itself down the track," says Osborne.

Inflation eats into income and savings, which can negate the buying power of consumers both now and in the future.

Inflation may be on the way, leading to more consumer woes.

"We have a very strong view (at Merk Investments) that there is a risk of inflation around the corner given what the Federal Reserve is doing -- the interventions in the market and printing trillions of dollars. That is a massive risk for the American consumer," Osborne says.

Savings, net worth and debt

Though the personal savings rate can't tell economists how much individual households are saving, it is a good indication of the amount the country as a whole is saving.

Though high levels of debt worked very well in the early 2000s to whip the economy to a fever pitch, it failed miserably as a long-term strategy.

The only sure long-term strategy for individuals and the country is the savings model. If everyone is saving and not spending, there may be a temporary setback to the economy. But eventually all of the savers will have the confidence to spend more money -- more wisely this time.

"Since the beginning of 2008 households have lost $11 trillion in net worth. That is about the size of the entire U.S. banking industry," says Schenk.

"Net worth has declined and declined significantly, and it won't come roaring back -- unless you can foresee or forecast significant asset bubbles in the future -- in part, because the way it will come back is the old-fashioned way of people setting more aside in their savings accounts and retirement accounts," he says.

When consumers dump their debt and pump up their savings, the economy will trundle along at a quicker pace.

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