personal views of a former fed trader

$2 Trillion Pandemic Savings

There are around $2 trillion in pandemic savings held by American households that have yet to be spent. Despite a brief recession, fiscal stimulus supercharged American incomes the past year by maintaining wages through the PPP program, topping off incomes with stimulus checks, and boosting unemployment benefits. At the same time, Americans consumed less than usual as lockdowns limited spending opportunities. As noted by Clarida in two recent speeches (here and here), Americans have accumulated over $2t in pandemic savings that can continue to fuel aggregate demand. In this post we walkthrough how this figure is derived, sketch out the form and distribution of the savings, and suggest that its ‘helicopter’ source implies a further boost to inflation in the coming months.

It’s Raining Money

Financial savings are what’s left of your income after taxes and spending on real goods and services. During the pandemic many special programs were rolled out to support household incomes: $1.1t in forgivable business loans to maintain payroll, $800b in direct stimulus checks, and $700b in extra unemployment benefits. While the pandemic programs of other countries prevented incomes from falling too much, the U.S. programs actually significantly boosted incomes. Overall wages did not fall, and total income rose above trend due to transfer payments (stimulus checks and unemployment benefits).

Payrolls was maintained even though the economy shutdown. Transfer payments put income above trend.

Although personal income moved above trendline, personal spending moved below trend line as households had fewer spending opportunities due to lockdowns. Higher incomes and lower spending left the public with an estimated $2t in “excess savings,” which is computed using a pre-pandemic baseline of ~$1.3t in annual savings. The jump in excess savings is notable across the developed world, though particularly high in the U.S.

Using 2019 savings of $1.3t as a baseline, additional savings during the pandemic period is estimated to be around $2.5t at year-end

Note that “savings” here is a financial flow that simply refers to disposable income not spent. It is different from “savings” in the GDP sense, which refer to real output produced (goods and services) and not consumed. You can have financial savings without output because money can be created by commercial banks or the government. In this case, the extra $2t was in part funded by money created by the Fed and given away by the Treasury.

Distribution of Financial Savings

Financial savings enter each household as bank deposits (numbers in your bank account), but can also be spent on financial assets or used to paydown debt. When they are used to purchase financial assets the total level of deposits doesn’t change, just the allocation and asset prices. For example: Person A spending $100 to buy TSLA from Person B simply shifts ownership of the $100 deposit to Person B in exchange for TSLA shares. This transaction can increase financial asset prices but not the overall level of deposits. However, deposits can be destroyed if it is used to repay a loan from the bank. Aggregate data shows debt levels little changed and a ~$2.3t increase in checking deposits from 2020Q1 to 2021Q2, so it appears much of the savings remains in financial assets and deposits.

Overall household debt appears to continue to trend higher

The pandemic savings were distributed very unevenly with increased checking deposits most pronounced among high income households. This is a global phenomena that appears to reflect the tendency of high income earners to spend a disproportionate share of their income on services, which were less available during the pandemic. In the U.S., the top 20% earners saw their checking deposits increase by $1.5t since March 2020. Although high earners did not benefit from transfer payments, they earn a disproportionate share of aggregate income (5% of households receive 23% of aggregate income). This savings distribution may in part explain elevated asset prices, since higher earners are more likely to buy financial assets.

Checking deposits overall increased $2.3t since March 2020

Lower income households saw a notable $750b increase in checking deposits, but that is in large part from Fed financed transfer payments. This source of funding has important implications for inflation. Fed financed transfer payments create purchasing power without also adding to the supply of goods and services. Usually, one must work (produce goods or services) to earn money (purchasing power). Newly printed money upsets this balance by increasing purchasing power without also increasing the supply of goods and services.

Affordable Inflation

Higher prices usually help balance supply and demand by reducing demand, but that doesn’t work well when everyone can afford the higher prices. Although the supply of many goods has already exceeded pre-pandemic levels, prices continue higher because households can afford it. Households are wealthier than they have ever been and nominal wages are rising at historic rates. The $2t in pandemic savings suggests that prices can continue to rise, with increases shifting to the services sector as higher income households resume their spending.

Source: Bridgewater article “It’s Mostly a Demand Shock, Not a Supply Shock, and It’s Everywhere

Note that the level of pandemic savings is large not just in the U.S., but also across the developed world. These global savings are all partially financed through outright central bank printing. Prices will continue to rise globally as these financial savings enter the real economy and flow through globally interconnected (and inelastic) supply chains.

9 Comments

  1. Riki

    Excellent article Joseph! Thanks.

    One of the underpinning reason I believe that PMs have stayed in a tight range and only had a relatively shallow price pull back, albeit time has been extended.

    It will also be interesting to see how Napier’s thesis works out with regard to governments forcing fund managers to purchase bonds and its subsequent impact on the stock market, real rates and consequently gold and silver.

  2. Norm Mogil

    Using an y- axis as ouput and a x- axis as price the supply curve moves up due to shortages resulting in higher prices and lower output. This is deflationary as output falls, We are seeing this as auto workers are laid off despite higher car prices ,
    Norm

  3. Dave

    How will the $1T infrastructure bill make its way into the economy? Are there endless investor savings to be re-allocated into the economy?

    • Joseph Wang

      Looks like its spending will be spread out over a number of years, so might not be super impactful overall.

  4. rsm

    Why not pay inflation plus 2% (say) on retail Fed CBDC accounts, to encourage individual savings as prices rise?

    《When they are used to purchase financial assets the total level of deposits doesn’t change, just the allocation and asset prices. 》

    Why wilfully ignore leverage?

    Aren’t you just telling a tired old mainstream story that ignores glaring noisiness in prices, to serve your agenda of keeping public money flowing to the rich whenever they need a bailout, while using inflation as a power play to keep the poor in their proper place?

    Wasn’t Fischer Black right that inflation is noise? Why not simply adapt to arbitrary inflation with full indexation?

  5. Dot

    “Higher prices usually help balance supply and demand by reducing demand, but that doesn’t work well when everyone can afford the higher prices.”

    Any estimates when the excess will be spent and affordability will become a serious problem? It seems prices will be very high due to little demand side discipline and many households will be hit hard when the money runs out.

  6. Thomas

    Is this a tale of two cities?
    How do you reconvene “Almost 20% of US Households Lost Entire Savings During Covid” with “Households are wealthier than they have ever been”.

    I feel like there’s going to be quite a bit of demand destruction coming up as much of the participants in the real economy are actually poorer and worse off than they were before covid. A lot of these people have given up working because it’s not worth it, the meager gains in raises does not offset the increased costs of housing/rent and living costs, reducing the amount of money available for amenities. The carrot never seems to get any closer, so people have given up and resigned. Overall consumption should fall.

    Rich households are doing better but they need to increase consumption in order to match the shortfall in consumption from less well off households and there’s a limit to how much you can go to eat out each week.

  7. James Mathew Harris

    Do you happen to have anything I can read about which goods have caught up with or exceeded pre-pandemic supply? I’d love to see those links.

  8. Rayoniz

    The interesting piece of the puzzle is that things should ultimately reach equilibrium through exchange rate. But now we are just robbing China of their goods by giving them pieces of paper and they will be left seeing their massive reserve lose value once USD eventually devalues against their RMB.

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