Summary
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U.S. household wealth is under attack on two fronts. On the one side, the stock markets are in chaos. On the other, housing wealth has suffered a rare but brutal decline.
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From now on, U.S. households will need to save in order to achieve their financial objectives, aside from paying back part of their debt. Consequently, we are witnessing a turnaround in the U.S. negative savings trend that began back in the early 1990s and the phenomenon is playing out very rapidly.
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Households will henceforth determine their level of savings and adjust their consumption according to income level. While the savings rate climbs towards its new balance point, consumption will need to grow at a slower pace than income. The transition from a low or almost nil savings rate to a higher one will not be painless. However, once this new rate stabilizes, it will be possible for consumption to grow more or less in lockstep with income.
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Consequently, the faster the savings rate rises, the shorter the consumer recession will need to last.
