Remember when they said not to worry about the low saving rate?

Off-topic but for your next market swing commentary you can say having received the expected 1/2 point cut from Ben, the ADHD market immediately said but hey now what are we going to pay attention to? Aww look at that lolcat. The market could not be distracted for further comment.

Is there an obvious relationship between tax cuts and the almost linear reduction in savings rates beginning in 1982?

the ADHD market immediately said but hey now what are we going to pay attention to?

yesterday's big gain in the Dow was the "preaction" of the market to the anticipated rate cut. Since all that happened today was what was expected, the market didn't react much at all -- the arbitrageurs had already come close to re-establishing the risk/reward equalibriuum yesterday -- today was just about making minor adjustments.

But this cut isn't going to accomplish anything at all (other than make it even harder to get out of the recession). Its horribly timed -- nobody is thinking "expansion" right now, and nobody is thinking "gee, if only the Fed rate was 1/2 a point lower, I'd loan money to that guy". Bernacke just lined the pockets of the arbitrageur -- but then again, that is all that Paulson has been doing for the last six weeks.

Thanks, Justin.

In 1994, in California, was when my house began to appreciate. If you look at the chart, people could have assumed that their house was savings enough, it was better to spend money fixing it up, and better to pay it down. That's what I did.

A good question to ask is whether interest rates being low and stocks not paying dividends discourage saving and encourage spending, and whether tax breaks or something else might be needed if we think that this is important.

Paul,
So, if the Fed were to have dropped interest rates by 3/4 point to .75% then it would have made no difference? What about market and investor psychology?

@Don: I thoroughly approve of tax incentives to save, but that's not the way our economy works. Even after all this, there is no institutional advocate for saving (also known as a large campaign contributor), and that's what you need to get Congress on board. Most tax forms refer to interest from savings as "unearned income." How's that for discouraging?

"Paul,
So, if the Fed were to have dropped interest rates by 3/4 point to .75% then it would have made no difference? What about market and investor psychology?"

bryan -- it would have made no difference in the economy, but it would have lead to higher stock prices. A half point cut was absorbed on Tuesday, the market would have required further adjustment if the cut had been greater or less than the expected .5% cut.

Right now, the only form of stimulus that makes any sense is a "Christmas cash" card--give everyone a $200 debit card that expires on December 25th, and only allow it to be used for purchases of goods made in America.

" I thoroughly approve of tax incentives to save, but that's not the way our economy works. Even after all this, there is no institutional advocate for saving (also known as a large campaign contributor), and that's what you need to get Congress on board. Most tax forms refer to interest from savings as "unearned income." How's that for discouraging?"

how would you feel about making all interest on federally insured deposits not subject to taxation at all as a means of stimulating savings?

I think that there should be different levels of taxation on different types of capital gains -- pure "savings" and municipal bonds should be untaxed up to $250K per person, corporate bonds and cash dividends should be taxed at a relatively low rate, and capital gains accrued by the appreciation of assets should be taxed at a higher rate (and that would include the resale of bonds and CDs when their asset value exceeds the purchase price.)

@Paul: I think I like your goal, but I also require simplicity in taxes. It insults me that the IRS advocates that the average American hire a tax professional to help them do something that should take most of us only a few minutes every year.

Curmudgeon --
The reason that people require tax professionals is because the tax code contains so many ways to avoid paying taxes, and maximizing that avoidance requires a professional.

The problem isn't graduated taxes, or different tax rates for different kinds of incomes -- its your mortgage interest deduction, your education tax credit, everything else you can deduct from your taxable income, your 401k and Roth IRA, and the rest of the mess that voters eat up when politicians advocate them -- but about which no one stops and thinks that they're going to need an accountant to figure it out.

[...] Expect the personal savings rate to increase over time.  (Curious Capitalist) [...]

Can someone show the actual calculations for savings rate. I have sent the question to the govt agency who calculates the rate but never got a response.

Its like a super secret calc and I have never seen it picked apart in the media.

I know the savings rate considers paying down principal as savings. I assume 401k contributions are considered savings.

Given those two assumptions, how can it be so freaking low!!! Esp. since the well to do must be saving a large amount of money.

I have already asked more critical questions of the savings rate calculation than I have seen in the media over 5 years. However, there is probably a plumber somewhere who needs the attention of a 100 journalists.