It is election season in the US and the campaigns are at their peaks. As I watched the news, I saw a constituency where the home loan foreclosures were touching a whopping 79% and all that the candidates were talking off was who is to blame. No one was offering solutions to the voters. This is the first time that I am coming across a situation where home foreclosures in a location is as high as 79%. The pressure must be really high for these families.
These are rainy days for these families. So, what happened to our old habit of tucking away something for the rainy day? The Household Savings Rate in India is 24% and in China is 25%. Germany is at 11%, Japan is 7%, UK is 5.5% and the US is touching 5-6%. It was hovering at less than 2% in the US till 2007. With the onset of the Global Financial Crisis, we see an increase in the Savings Rate in the US. The rainy day principle does not seem to be working in some of the developed nations. I am still wondering why the savings rate in the US is so low. Maybe the policies of the 1980s famously known as the Reaganomics is a contributor. These policies resulted in what is now called "Supply creates its own demand"...with more money in the hands of corporations and individuals, consumption shot up. In the US, consumption is 71% of GDP. This, combined with easily available loans and increasing asset prices, saw savings rate in the US came down from 10% in the 1980s to 1.4% when the global financial crisis hit all of us. Over the last 3 years we have seen the savings rate go up but there is a lot of room for improvement.
What does this low savings rate mean for the common man? This means that if you earn US $100 (disposable income), the whole household saved only $1.4. Now, picture a scenario of where interest rate goes up and you have to pay more for your mortgages. Even a very small change in the economic circumstance such as a layoff or a temporary loss of job or an increase in interest rates, would cause tremendous stress in the family because they have to change their consumption habits completely in order to pay off their mortgage commitment. Those who have saved will be able to manage the crisis. However, those where the savings is just $1.4 out of $100 will struggle. The result is default and this is what we are seeing in the US.
Closer home in India, we see inflation going past 10% and food price inflation at close to 18%. This is because food production has not been able to keep up with increasing population and also the number of people moving above the poverty line. Though the economy grew by 7%, agriculture grows by only 1.4%. This has caused a supply side problem and, hence, food price inflation. What is now needed is inclusive growth where the agriculture industry grows at a faster pace. This needs investment and more area to be brought under cultivation. Families have been under stress as they divert money towards food spend. This has caused stress in families as they have lesser disposable income to manage other expenses. However, banks have not seen as many housing loan defaults. This is primarily because of the habit of higher savings.
My dad once told me that he managed his family expenses when his salary was Rs.100 per month in the 1950s and did the same when he earned much more in the 1980s. He told me that happiness is not in how much more you have to spend but managing within your means. He told me that if I can limit my needs and wants to be within my means, there would always be better long term consequences. He must be correct because he managed to maintain his standard of living till he passed away.
When I look at all this, I am reminded of what Buddha taught us in his middle path - to remove greed. He said that most of our problems start because we struggle to contain our needs and wants and after sometime greed takes over. If we can reduce our needs and wants, I am sure, we will learn to live within our means. This will help us stash away something for that rainy day.
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