Personal savings rate measures the amount of disposable personal income that isn’t spent. And Americans for decades have spent more than they have earned and taken on more debt than many can afford to pay. The good news is… the personal savings rate of Americans is up by almost three percent in the second quarter of 2008, after almost four years below one percent. That is also the bad news.

To be sure, even this marked increase in savings is still below what consumers save in other countries. In Germany and Japan, for instance, they are known to save as much as 10 percent of their paychecks.

This new found increased propensity to save in America is no doubt out of fear — fear of losing a job in an economy where some economists say unemployment rate could top eight percent next year. Scenes of New York bankers with boxes of personal belongings leaving their offices during this current economic crisis deliver a compelling message to save for that rainy day.

Economics 101 teaches us that it is good for people to have some amount of savings over the long haul, because domestic savings create a pool of money from which banks can lend to entrepreneurs to buy the capital goods needed to create jobs. Eventually, that pushes living standards higher over time. For America, as it is for the Philippines, a growing domestic savings pool could also reduce the need to borrow money from abroad.

But thrift, while a virtue, has a short run cost to the economy if too many people do it at the same time. For a consumer driven economy like America (and to a great extent ours too) danger lurks when people start to significantly reduce their spending. What makes it worse is for people to hoard all the cash they have saved in mattresses. This translates into less business for the retail sector. Not good at all…

In the US, they are starting to feel the impact of the shift with last week’s steeper-than-expected decline in retail sales. Retail is down 1.2 percent in September, in their first year-on-year decline in six years. Economists were only expecting a 0.7 percent drop.

That’s the kind of bad news no one wants to hear at this time, specially for an economy like America’s that is dependent on consumer spending for two-thirds of its economic activity. This new found thriftiness will exacerbate a general downturn and will weaken the impact of the massive interventions the government has made in the financial markets.

This reminds us of Japan and its 10- year depression in the 90s. No amount of pump priming by the government could make the Japanese, who are by nature thrifty, to spend. As much money as is pumped into the economy merely gets stashed away in tatami mats all over the country. Economists have commented that the Americans may be starting to look a tad bit Japanese now in more ways than one expects. If this continues, the downturn may take a while to run its course than the year or two usually talked about.

The emerging thriftiness was confirmed in an interview by Fortune magazine of Sam’s Club CEO Doug McMillon. “People are having to watch pennies more than they might have a year ago and are making tradeoffs. They’re making decisions about what they must have and then making a few discretionary purchases – but we’ve seen fewer discretionary purchases in the past few months.”

The Sam’s Club CEO doesn’t think next year is going to look a lot better than this year. He in fact, sees less growth than they’ve seen in recent years, and people are even now, spending their money on dramatically different things.