Saving too much?

People are saving their money again. So much so, in fact, that economists are starting to get worried for the health of the economy. Now that's pretty funny because, not long ago - and I'm talking within a year here - many economists were actually concerned that Americans were spending too much and saving way too little. Oh how a recession changes things…

Let's take a look at how Americans have changed their savings patterns, and why that might be cause for alarm.

1) U.S. savings rate has risen from just 0.8 percent last August to 3.6 percent in December. Now if the amount people earn was rising steadily, this drastic increase in savings wouldn’t be cause for concern. But in the past 6 months, the average American income has been steady, if not a little lower. So where are people getting the money to save? By cutting their spending. And such a big decrease in spending over such a small period of time could spell disaster for retailers… who happen to employ a huge segment of the population.

2) People are saving more because of unrest in the economy. Before the economy started really heading into a tailspin, people were out spending. A lot. In fact, the savings rate was at historic lows, averaging 0.5 percent from the beginning of 2005 to April 2008. Sometimes the savings rate even dipped below zero percent, meaning that people were spending their savings or buying on credit. But once the housing market and stock market bubbles burst, consumers got scared about their job security and the availability of credit. (Which is to say, it's not available.)

3) A high savings rate is not necessarily a bad thing for the economy, but it is when the savings rate rises so drastically and banks don't keep up the pace making loans. By historical standards, our current rate of savings is not that big of deal. From the mid-1950s to the mid-1980s, the savings rate was much higher: from eight percent to 11 percent. The problem is how quickly Americans have changed their attitudes. In the 1950s through the 1980s, banks would usually take the money people saved and dole it out as loans for small businesses and to people looking to buy houses, cars, or education. That investment spurred further economic growth. Nowadays, though, banks are scared to make those loans. So as a result, the money people are saving is sitting in a vault, hoarded because banks executives don't trust that people seeking a loan can pay it back.

The combination of fewer bank loans and increased savings is strangling businesses: they can't get the loans they need to cover costs, and they're not getting money from consumers either. That leads to store closures and layoffs, as businesses have to cut costs just to stay afloat, which in turn leads to even less spending. Such a self-reinforcing cycle is exactly NOT what we need in the middle of a recession.

So what's the solution? That, my friends, is what all the hubbub in Washington is about.

Ali Velshi is CNN’s Chief Business Correspondent.

Posted by: Ali Velshi -- CNN chief business correspondent
Filed under: Economy • Finance • Living • Uncategorized • Velshi