Wall Street's twin deficit troubles

Article Abstract:

The US trade deficit is giving cause for concern, as is the difference between personal savings and investment. The financial deficit of the personal sector may have arisen as a result of high stock prices, which mean that there is less incentive to save. A drop in stock prices could lead to recession as savings are rebuilt. The personal financial deficit may also have arisen as a result of hopes that future incomes will rise as a result of technology, though it is unclear that this is the case. The most optimistic scenario is for income increases to allow savings to be rebuilt.

Balance of Payments, Gross Private Savings, Economic aspects, Savings

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Why US savings are no problem: Fears that a stock market crash could plunge the US into recession are mistaken. Consumers may be less sensitive to rising share prices than thought

Article Abstract:

Figures show that US households saved only 0.4% of their income in 1998, and spending has been driven by the sharp increase in share prices. Low inflation reduces savings, as consumer have less need to add to their savings if real wealth is not being eroded by increasing prices. The unemployment rate is low, so there is also less need to save. Therefore the consumer boom in the US may be more solidly based than generally thought. However for equity investors, the low savings ratio is a main cause of the large balance of payments deficit.

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