I read in the WSJ that the Fed Vice-Chair thinks that if househoulds
move their savings rate to somewhere between 3 and 7 percent, it would
help capital accumulation in the long term.  Why is that?  And, I read
elsewhere that consumption would drop in the short term if people
saved at a historically high rate.  Isn't consumption a macro-economic
measure of how well the economy is doing?

Hi gmt38-ga! Thanks for a very interesting question.

Please take note that economists do not generally agree on what
constitute savings and its effects to the economy. But as they say,
there should be balance in our lives. Spending is good for the economy
but having dwindling savings takes a radical turn. Here are the major
concerns when a nation's savings rate drops.

a.) As what is said in the comment below banks finance capital
investments and without your savings, banks will get the money
elsewhere. -

"A low savings rate troubles some economists because savings is needed
to drive the economy. Put $50,000 in the bank, and the bank lends out
that money to others for mortgages, personal loans or business use. Or
put $50,000 in a stock fund, and your money is put to work raising
money for new businesses or supporting the capital markets as a
whole."


b.) Without savings, people may have to fund long-term investments out
of their present income thereby resulting into hold on purchases
thereby slowing the economy as well.

"Cash-out refinancings and home-equity lines probably will slow
sharply this year, as the housing markets cool. Without big gains in
home prices, consumers will have to start funding their spending out
of income -- or traditional savings. They might also cut back on their
spending, which would hurt the economy."

"Are Americans borrowing trouble?" by John Waggoner
http://159.54.226.83/apps/pbcs.dll/article?AID=/20060306/BUSINESS/603060309/1040


c.) Retirement might put some baby boomers into hard times because of low savings.

?To prepare for retirement, ?aging workers should be building their
nest eggs and paying down debt," the note said. "Instead, many of
today's workers are saving almost nothing and taking on large amounts
of adjustable-rate debt with payments programmed to rise with the
level of interest rates. Failure to boost saving in the years ahead
may lead to some painful adjustments in the future.?"

?Economists debate the savings rate?
http://www.menafn.com/qn_news_story.asp?StoryId=CraKE0eiemZC0nevJB25VBwLZDhnKzwjHD

 
Search terms used:
Importance "savings rate" economy contribution

I hope these links would be helpful to your research. Before rating
this answer, please ask for a clarification if you have a question or
if you would need further information.
                                                          
                              
Regards,                              
Easterangel-ga                              
Google Answers Researcher

---

Clarification of Answer by easterangel-ga on 07 Mar 2006 06:57 PST

You know what, after answering this question, I was able to catch on
TV this 2004  documentary about credit cards from PBS and Frontline.
It is deeply related to your question.

PBS has this documentary online so you can view it over streaming video.

http://www.pbs.org/wgbh/pages/frontline/shows/credit/view/

What a day! :)

Thanks for all the help!!  It's much clearer now!

If you are saving money, you aren't spending money. Consumption of
something has to decrease.


Money saved is money available for lending by banks. Loaned money is
invested in something.

I don't want to spoil it for a Researcher to answer, but you should
have the tail end of the idea with this info.

gmt38-ga,
You should also recognize that the two persons are stating truisms: 
if people save more, there will be more accumulation of capital;  if
people spend more, it will fuel the economy.  They are talking about
different things.  Maybe they were contradicting each other whereever
you found the statements, but they are both right, on the face of the
statements mentioned.

Relative to Europe, the savings rate has usually been significantly
lower, something German economists hold to be a weakness of the US
economy.  What the savings rate does not reflect is investment in
housing, usually accompanied by increased debt  - another bad thing in
the Germans' eyes.
This ignores or oversees the fact that paying down a mortgage is also
a form of saving, accumulating capital.  The collection of statistics
doesn't look at this, at least not in those terms, which apply to the
individual home owners, but get offset by others' new mortages.
In recent years, home investment has not only been this form of
saving, it has proved to be a great way to increase accumulation of
capital as prices have increased.

Is that any help?
Myoarin