Saving. A domestic saving rate in excess of 50 has served China well.

Higher household saving depresses consumption because it is the difference between households after tax income and what they spend.

The strength of the Indian economy is underpinned by a high saving rate and robust investment.

Meanwhile, China s savings rate remains stubbornly high.

Apart from accounting for the global divergence in savings rates, tight credit constraints in China might explain the country s high, and rising, savings rate especially as the large rise in national savings is attributable mostly to household savings.

No politician has publicly stated that US solvency requires such draconian adjustments, because the American public is far from agreeing to the sacrifice needed.

The net saving rate fell to near zero.

The excess saving could also decline if housing construction picks up.

Instead, it reflected a fall in the personal saving rate.

However, aging will keep the saving rate from falling at the same pace.

But, with the current low rate of household saving, the cycle of rising deficits and debt will soon make national saving negative.

Since the saving of younger savers is now high and the dissaving of the older dissavers is low, the net saving rate is high.

An economy s current account is the difference between its investment rate and its savings rate.

The household saving rate has collapsed in recent years, falling to less than 2 .

Of course, China s savings rate will also decline, but Japan s experience since the 1980 s demonstrates how a sharp fall in investment can generate large and persistent current account surpluses, even when the savings rate is falling and the currency is appreciating.

The saving rate in each of those 25 years was between 7 and 11 .

That would leave a net national saving rate of just 2.5 of GDP.

And with that lower saving rate will come a smaller current account surplus.

Although the saving rate came down gradually in the 1980 s, it was still 10 in 1990.

Looking ahead, the saving rate may rise even further, and will, in any case, remain high for many years.

So bringing the savings rate down is necessary if domestic and external balances are to be achieved.

The Japanese government has been able to sell its bonds to domestic buyers because of the high rate of domestic saving.

The rapid rise in saving has reduced consumer spending, slowing the pace of GDP growth in 2009 and in early 2010.

If the saving rate continues to rise rapidly, it could push America s fragile economy into another downturn.

One sure way to reduce the savings rate in China would be to develop an American style mortgage market there.

The drop in the saving rate can be readily traced to a massive increase in the rate of household consumption.

The result in Japan would then be rising real interest rates as the low private saving rate runs head on into large fiscal deficits.

Fears of future wealth taxes could discourage entrepreneurship and lower the saving rate.

But then the saving rate fell by a full percentage point, reaching 5.3 in December 2010.

Their net effect will be to raise consumption as a share of GDP and to reduce the national saving rate.

But what China really needs is a greater effort to promote domestic consumption and lower the savings rate.

When all of these reforms are realized, China s national saving rate may be reduced to 45 , from 51 currently.

The problem currently is that a trade deficit has emerged at a time when the national saving rate is as high as 51 .

By contrast, China had a fixed investment rate of 41.7 of GDP and a savings rate of 51.9 , reflected in a large surplus.

But when a country s growth rate continues to increase, its saving rate would increase faster than its investment rate, so it is more likely to run a current account surplus.

Another implication of this view is that the steep rise in savings in China is largely driven by a rise in the savings rate of middle aged Chinese (rather than a fall in the borrowing rate of the young).

But the fall in domestic saving is likely to cause the Chinese government to allow the renminbi to appreciate more rapidly.

If the saving rate now rises quickly to that level, it will be hard to keep overall GDP growing.

Japan s ability to sustain high fiscal deficits, low interest rates, and net capital exports has been possible because of its high private saving rate, which has kept national saving positive.

Second, it could absorb excess German savings by letting unemployment rise as local manufacturers fired workers (because rising unemployment forces down the savings rate).

In 2007, the United States had a savings rate of 14.6 of GDP, but an investment rate of 19.6 , generating a current account deficit.

The US should cut its budget deficit, increase its saving rate, and generally get its own house in order.

The most important task for China is to reduce the saving rate, which equaled 52 of GDP in 2009.

However, in a country with a large mass of effective savers, the savings rate can rise, rather than fall.

But it is worth remembering that the saving rate averaged 9 in the quarter century from 1960 to 1985.