Would increased savings cause more of a recession?

If the majority of middle-class americans started saving money (as opposed to the Bush post-9/11 plea to spend spend spend), would that cause more of a recession or help us out of this mess?
I ask because in looking at the very low interest rates (which are an encouragement of more spending), it just seems that that money spent would probably do better in a savings account’s or investment account’s interest, in where said interest would be further invested.
Or, to be more clear, the interest would not go into corporate pockets but into more private pockets.
(ok, I’m getting dizzy now)

Ok, less dizzy now.
I guess my question begs the next one: is there a better way to get out of a recession than spending?

Increasing rates of saving are viewed as evidence of negative consumer sentiment. In other words, if economists see savings rates increasing, they generally assume that people are girding for tough economic times.

The effects can vary widely depending on the severity of the savings rate increase and the current economic climate. It can be interesting to look at Japan, which underwent a severe crisis lasting fifteen years. As the stock market and economy floundered the Japanese continued to save despite disincentives that should have forced them to spend money. If I recall correctly interest rates were at 0% and even below.

Americans do not save enough, and need to save more and carry less debt. If that happened at once it would be tough on the economy. If it happened slowly over time it would benefit the health of the economy long term.

Which is why the government simultaneously encourages long term saving, in the form of 401k plans, IRAs, college saving plans, and the like.

Right **Mr.Moto ** reminds me that I should differentiate between short and long term savings. Increased invested savings is a good thing. So an increase in investment in 401ks and the like would not be viewed as evidence of negative sentiment, especially if the majority of those savings go to stocks or stock based funds.

Increased short term savings like increased savings account balances and short term CDs can be a troubling sign. With interest rates at historic lows one would have to have little confidence in the economy to decide on interest bearing investments over spending or equity investments.

There are so many factors it’s impossible to give a “theoretically.” At this point an increase in savings would probably exacerbate the recession. There is more than enough money to go around on the lending side so savers aren’t needed to provide cash to keep interest rates low. Of course, paying off high interest rate debt would be a better medium term option.

Ok, that’s where I was trying to go. (economics makes me go funny…er, funnier)

If there is more money on the lending side and less on the savers side, isn’t this imbalance detrimental to things?

From the Japan example, more money on the savers side isn’t good (just the opposite imbalance).

What we should be going for is balance on both sides?

The only money available to be lent is from what saver’s save. Bank’s can only lend money based on the amount of their deposits. The clearing mechanism for savings and investment is the interest rate. If borrower’s want more money, they will have to induce more saving by offering a higher interest rate. If there is more saving than current demand for investment capital, the interest rate should come down to induce people to borrow. People can borrow money to either consume or invest in new businesses. In general, savings and consumption are mutually exclusive; you can either spend the money you earn or save it. Whether or not it would be better for the economy for people to spend or save depends on where lies the bottleneck in the economy. If investors are waiting to see signs of consumption before investing it might be better for individuals to spend, but not if the decrease in savings raises interest rates prohibitively. If the main bottleneck to the economy is high interest rates prohibiting new investment, then it’s probably better for people to save to add to the pool of available money to be lent thus lowering the interest rate. It’s impossible to say that anything is inherently good or bad for the economy without looking at the context. I’ve grossly oversimplified things here but it’s a start.

Oversimplified? Christ, I had to read that paragraph 6 friggin’ times to get it!

But I got it, and it answered my question excellently. I thank you kindly.

The “bottleneck” is the key to things.

My poor grammar/style needlessly complicates things. Glad I could help.

OK, I cannot for the life of me figure out what this means. How could interest rates be below 0%? Would the bank be paying someone to borrow money? (Here’s your $1000. You’ll pay it back at $10 a month for 90 months …)

Would that be nominal interest rates below 0%? Or real interest rates below 0%?

If it’s the real interest rate that’s below 0%, that simply means that the nominal interest rate (what banks charge to borrowers) is less than inflation. If the nominal interest rate is below 0%, I’m guessing that there’s negative inflation (deflation), and that banks expect that deflation will outstrip the negative nominal interest rate.

Euroyen (Yen denominated accounts outside the Japanese banking system) and Japanese T-Bill forward rates went into negative territory for a few weeks in 1998. Mind you, this is not an interest rate available to the public, but only to other banks and large investment institutions. Think of it as paying to keep your money safe. If you knew there was a high chance of being robbed, wouldn’t you be willing to pay someone with a safe to hold it for you? Well Japanese lenders didn’t trust their money with Japanese institutions because they were too great of a credit risk, so they basically paid overseas banks to borrow the money just to keep it off the balance sheets of defaulting Japanese banks. A very popular trade among US hedge funds back in the mid late 90’s was borrowing Yen at nothing, selling it, and buying US securities with it. Not only did we make money on the US securities, but also on the tanking yen.