The magic of negative savings
Dear Uncle Alan seems concerned that the US federal government spends dramatically more than it receives in income. Too bad he's not terribly interested in American households doing the same thing.
To demonstrate how dependent the contemporary US economy -- and by extension of America's role as the buyer of first resort (remember that we're screaming towards a $725bn trade deficit this year), the global economy -- is on the indefatigable yet income-short American consumer, consider what third quarter GDP growth would have been without it.
In 2005:III, we recall, real GDP growth was a pretty impressive 4.3%, the highest in six quarters. Nominal GDP (SA) stood at $12,601bn, up from $12,378bn in 2005:II -- thus a nominal annualized growth rate of 7.2%. However, nominal US personal saving (SA) was $133bn in the red in the third quarter. If Americans consumed with a 0% savings rate in 2005:III rather than the actual -1.5% rate, nominal GDP would have been only $12,468bn -- or a nominal annualized growth rate of 2.9%. Not quite so impressive.
But what is all this in real terms, you ask? Good question. In 2005:II, real GDP in constant 2000 dollars stood at $11,089.2bn. Using the PCE price indices from the BEA, we find that with a savings rate of 0% in 2005:III, real GDP for the third quarter would have been $11,087.2bn. It doesn't take a math genius to see that real GDP for 2005:III with a 0% savings rate would have been lower than in 2005:II -- and have generated a 0.0% real growth rate.
In short, without negative savings and all other things being equal, the US economy would be at a standstill. Now that would have been one hell of a headline.