Twenty-five years ago, American households saved nearly 10% of after tax income, Harvard Economist Martin Feldstein writes over at Project Syndicate.  By 2007, the savings rate had plummeted to 2%.  And then everything changed.  

The stock market dropped sharply. Home prices fell 40%, completely wiping out the equity of one-third of all homeowners with mortgages. Household wealth is now $10 trillion dollars less than it was before the recession began.

That fall in wealth means that households must save more to prepare for retirement, and that retirees are not able to dissave as much as they did before. Banks and credit-card companies have become much more cautious about extending credit. And, with unemployment stubbornly high, many households are saving in order to have additional cash if they should lose their job or be put on shorter hours.

There is no way to predict what the saving rate will do next. Households’ need to rebuild wealth, and the lack of access to credit, implies that the saving rate could continue to rise from the 6.4% recorded in June (the most recent month for which data are available) to the 9% rate that America averaged in the decades before 1985. If that were to happen quickly, total spending could decline, pushing the economy into a double-dip recession. But if households instead become optimistic about the pace of recovery, they might choose to cut back on their saving in order to maintain consumption, despite weak earnings. Only time will tell.

Read America's Saving Surprise here.