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The Return of Saving: Revisited

Everyday on television and in print, market experts and forecasters throw around their opinions as to when the U.S. economy will finally return to solid economic growth.

Volumes could be filled with analyses trying to forecast the Fed’s next move; interpret what the latest jobs report means; or, translate the latest earnings reports.

To provide my MBA students some direction to navigate through all this noise, I refer them to Martin Feldstein’s seminal article published in 2006 in Foreign Affairs: “The Return of Saving”.

For those of you who haven’t read it, this short piece has been the playbook of what occurred before, during, and now after the Great Recession.

According to Feldstein, who was formerly head of the National Bureau of Economic Research, it was the decline in U.S. savings that underpinned the 2008 financial crisis and the subsequent economic downturn.

Lower savings meant lower investment, which, in-turn, cut deep into economic growth and increased unemployment.

It got even worse when foreigners like the Chinese and Germans- who had replaced Americans as the primary source of our investment capital- found themselves in tough times due to the lack of demand from the U.S. market.

So, things spiraled quickly downward.

Today we are still feeling the hangover from the debt-fueled boom years before 2008.

But it’s not all bad.

Feldstein says that as Americans slowly begin to reduce their debt and save more, investment will eventually follow and the county will emerge stronger than before: on a more solid footing.

Meld this with the energy revolution that is just underway and the future does look very bright.

It will just take time.

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