This morning's BEA report on personal income and expenditures was quite a surprise:  personal income and expenditures rose 0.4% and 0.6% respectively in January, much better than expected.  Much of the increase seems to be linked to COLA adjustments for government workers and people on government benefits (Social Security, etc) and is therefore probably not reason to hope that economists have been taking this banking crisis thing a little TOO seriously.

Savings, meanwhile, is on the march:  personal saving rose to 5% in January.  As Paul Krugman notes, that means that in the short run we can expect the economic contraction to continue, especially since banks aren't doing much to transform the savings into new investment (in part because businesses aren't much interested in investing in new productive capacity while demand is slumping).  The personal savings rate isn't even particularly high right now by historical or international standards--something closer to 8-10% would be more in line with everything except very recent history.

There is a lot of talk about the paradox of thrift out there, including from Krugman.  But just as I think the time has passed for attempting to cure the banking system's problems by pretending they'll get better if we just wish spend hard enough, at this point it seems to me that there is no realistic policy which can, or should, deter people from saving more of their income.  It doesn't matter how much stimulus you pump into the system; overleveraged households still need to delever, because their previous level of leverage wasn't simply predicated on a belief that things wouldn't get worse; it rested on a belief that they would get *better*.  Since they are obviously not going to do so, people are trying to rebuild their balance sheets.

Given that savings are probably going to increase to something closer to 10%, what does that mean for policy?  Well, for starters, it has big implications for our predictions for stimulus multipliers.  The money going directly to highly budget-constrained people will be spent--unemployment benefits, for example.  But much of the rest of it will be saved because our marginal propensity to save just radically shifted.