The USA Low Personal Saving Rate Would Make the Perfect Storm

Many important economists have been saying that The United States is a liquidity trap. I can summarize the concept of liquidity trap as a situation where a monetary policy has no effect in the economy. It happens when the interest rate is so low that any change in it does not make any difference.

What do we need to the monetary policy work?. The reduced interest rate helps companies to invest more money because of the reduced money price, and the increased investment impacts positively in the gross domestic product and so on. We can see how the monetary policy usually helps to reactive the economy by the supply hand. On the demand hand, the reduction of credit interest rate and the money abundance push consumers to buy more in a normal situation.

What is now wrong in the equation?.

Many things happens to arrive to the current situation, but I can sum up in only one indicator that in my opinion expresses the real problem, and it is the very low saving rate. Never historically was this macroeconomic variable so low, inclusive getting in september 2005 a negative value. The historic mean of the variable is around 7%, and in this new century the ratio is around 1.5% now recovering to a level of 2%.

Now The United States is in a recession, and the Federal Reserve has been reducing the target interest rate. The question is whether the monetary policy will be effective enough. My answer is not because the demand hand won't work. My response is based on the idea that the consumers are now leading with many problems. First of all, they are losing their main revenues, losing their jobs and looking how their main actives value are falling. Second ,many of them have debts to pay, and finally because they have very small savings. I think the present monetary policy won't help the economy, and the consumers will have to shield themselves through increasing savings and reducing consumption.

Finally, I agree with many economist's opinion that the economy recovery would take long, and a fiscal policy is necessary to help pass through this difficult moment.