Spending spree over as Americans walk without safety net

Americans are drawing down their personal savings at the fastest rate since the depths of the Great Depression, suggesting that US household finances may be more fragile than they look. The savings rate fell to minus -1% in 2006 and has now been negative for 21 consecutive months, according to Commerce Department data. Such a rate was last seen in 1933, when a quarter of the American workforce was unemployed and whole families were kept alive by charitable soup kitchens.

Charles Dumas, chief strategist for Lombard Street Research, said a spending spree by rich Americans sitting on fat asset gains might have played a role, but the main driver was distress borrowing by households struggling to keep their heads above water as each source of stimulus dried up. "There are no more tax cuts, no more house price gains, no more real income growth, and no more petrol price bonus," he said.

Some $390bn in mortgages with adjustable rates, taken out in 2004 and 2005 when interest rates were far below current levels, are due to ratchet up this year, in some cases doubling payments. Until last year, Americans were subsidising their lifestyles to the tune of $70bn a month through withdrawal of home equity. This has since dropped to nearer $30bn a month. The shortfall has been more or less covered by the falling savings rate - so far.

The slide into negative savings could hardly come at a worse time, just as 80m or so baby boomers start feeding into the retirement pool and prepare to draw down wealth. Large numbers could face poverty in old age. Yale professor Jacob Hacker said the average American was now walking a shaky financial tightrope, without a safety net. "American family incomes are on a frightening roller-coaster, rising and falling much more sharply than they did thirty years ago," he said.

The welfare net of health care and pensions once provided by corporations is crumbling as a result of globalisation, leaving families to shoulder the risk. Prof Hacker said personal bankruptcies had risen from under 300,000 in 1980 to more than 2m in 2005. Many were well-educated and with children. "They are not the persistently poor: they are refugees of the middle-class, drowning in debt, and frequently wondering how they fell so far so fast," he said.

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