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Big decline in savings could spark economic calamity: Albert Edwards

Households in the United States and the United Kingdom aren’t putting as much money away for a rainy day and that could mean trouble.

Albert Edwards, a strategist at Societe Generale, pointed out in a note Thursday that saving rates in the both countries have steeply fallen recently. In the U.S., the household savings ratio has fallen to 3.8 percent on a net basis, it’s lowest since the Great Recession, and to about 7 percent on a gross basis. In the UK, meanwhile, the savings ratio has slumped to 1.9 percent on a gross basis.

Edwards illustrates the savings-rate downfall in the chart below, comparing both the U.S. and UK rates:

“This was last seen in 2007, just before the bursting debt bubble blew the global economy and financial system to smithereens,” Edwards said, referring to the 2008 financial crisis.

The monthly ratio is savings as a percentage of disposable income.

The crisis sent financial markets across the globe into a tailspin and global central banks scrambling to stop the bleeding. It was then that the Federal Reserve and the Bank of England, along with other major central banks, introduced stimulative measures such as quantitative easing.

“The Fed and BoE should surely hang their heads in shame having presided over yet another impending disaster. Why will politicians and the people tolerate this incompetence? Indeed they won’t,” Edwards said.

The UK-based Edwards also said the potential economic calamity could be even worse in his home country because their savings rate is now below the U.S. rate.

[H]istory suggests that when UK SR (measured gross) declines to, or below, the US SR (measured net), as we saw in 1987 and as we see now, … we in the UK are sitting on a massive credit bubble that is primed to burst with recessionary consequences. Alarm bells will be ringing all around the Bank of England but it is too late.

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