The U.S. savings rate has been falling for decades. But that downward trend will likely soon be reversed, as factors such as rising mortgage interest rates force Americans to start saving more. The change will ultimately be for the better, but in the short term it could cause serious problems for the United States and its trading partners unless they start preparing immediately.

"The savings rate of American households has been declining for more than a decade and recently turned negative. This decrease has dramatically reduced total national savings despite a rise in corporate saving. In 2003 and 2004, the combined net savings of households, businesses, and government were only about one percent of gross national income -- the lowest level in at least 50 years.

This sharp decline in saving has had important implications for the United States and for the global economy. It has reduced productivity-enhancing net business investment in the United States to less than four percent of GDP and made the United States increasingly dependent on capital from the rest of the world to finance that investment.

At the same time, the decreased national savings rate -- and the increase in consumer spending that it implies -- has induced a rise in U.S. imports. Those imports have contributed to the growth of output and employment in many countries around the world."

Although repairing balance sheets is the right and responsible thing to do, when many simultaneously shift their priorities from spending maximization to debt minimization, Adam Smith's Invisible Hand reverses its normal direction and shrinks both the economy and the money supply. (edited excerpt)