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).
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.
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.
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.
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.
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.
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.