Introduction to Finance

dissaving
; that is, spending 
accumulated savings when consumption spending exceeds after-tax income.
As income increases, the individual will again be in a position to save. However, the sav-
ing will not necessarily begin immediately, as the individual may desire to buy the things that 
he or she could not aff ord during the low-income period. The amount of this need, notably for 
durable consumer goods, largely determines the rate of increase in savings during periods of 
income recovery.
On the whole, income levels are closely associated with levels of employment. Changes 
in business activity, in turn, infl uence employment levels. Downturns in the economy during 
1980, 1981–1982, 1990, 2001, and 2008 resulted in declines in employment levels and cor-
respondingly lowered levels of income. Post–World War II unemployment highs of the early 
1980s exceeded 10 percent. During the decade of the 1990s, unemployment averaged less 
than 5 percent, with deviations resulting in higher levels in the 1990 and 2001 recessions. 
The 2007–08 fi nancial crisis and the 2008–09 Great Recession led to unemployment levels 
exceeding 10 percent. However, the unemployment rate had declined to under 5 percent by 
early 2016. 
Economic Expectations
The anticipation of future events has a signifi cant eff ect on savings. If individuals believe that 
their incomes will decrease in the near future, they may curtail their spending to establish a 
reserve for the expected period of low income. For example, a worker anticipating a protracted 
labor dispute may increase current savings as partial protection against the fi nancial impact 
of a strike.
Expectations of a general increase in price levels may also have a strong infl uence on the 
liquidity that savers want to maintain. The prospect of price increases in consumer durable 
goods may cause an increase in their sales as individuals try to buy before prices increase. 
Savings are, thus, quickly converted to consumer spending. Corporate savings, too, may be 
reduced as a result of price increase expectations. In addition to committing funds to plant 
and offi
ce equipment before price increases take place, corporations typically increase their 
inventory positions. As for the individual, the prospect of an interruption in the supply of 
inventory because of a labor strike or other cause often results in a rapid stockpiling of raw 
materials and merchandise. The prospect of price decreases and of large production capacity 
has the opposite eff ect: the liquidity and fi nancial assets of a business increase relative to its 
operating assets.
Unprecedented price increases during the infl ationary 1970s led many individuals to 
develop a “buy it now because it will cost more later” philosophy. This resulted in a classic 
example of the impact that price increase expectations have on the spend-save decisions of 
individuals. Infl ation peaked at double-digit levels at the beginning of the 1980s. However, 
after some upward pressure in the form of price increases at the end of the 1980s, infl ation 
during the 1990s and the early years of the twenty-fi rst century has generally been in the 2 to 
3 percent range. Recent infl ation rates have been consistently below the 2 percent infl ation rate 
target being used by the Fed in setting monetary policy.