Economists debate excess savings, but in reality is there any such thing?
Excess No More? Dwindling Pandemic Savings
On August 16, San Francisco Fed writers commented Excess No More? Dwindling Pandemic Savings
In a study earlier this year (Abdelrahman and Oliveira 2023), we examined household saving patterns since the onset of the pandemic recession. Our study showed that households rapidly accumulated unprecedented levels of excess savings—defined as the difference between actual savings and the pre-recession trend—relative to previous recessions. Our analysis suggested that some $500 billion of the $2.1 trillion in total accumulated excess savings remained in the aggregate economy by March 2023.
Since then, data revisions show noticeable changes in household disposable income and consumption, while new data releases indicate that consumer spending picked up in the second quarter. Our updated estimates suggest that households held less than $190 billion of aggregate excess savings by June. There is considerable uncertainty in the outlook, but we estimate that these excess savings are likely to be depleted during the third quarter of 2023.
Excess Savings Cause
The excess savings are a result of three rounds of fiscal stimulus during and after the Covid pandemic.
The first two rounds of stimulus were by Trump. The third, and very excessive round of stimulus was sponsored by the Democrats.
Biden’s student debt cancellation and eviction moratoriums also fed savings. The result was the biggest outbreak in inflation since the 1970s.
The Fed, whose job it is to control inflation, not only failed to see it coming, but also kept QE going to the bitter end.
The debate now is how much excess savings remain that may fuel consumer spending.
Only Richest 20% of Americans Still Have Excess Pandemic Savings
On September 25, Bloomberg commented Only Richest 20% of Americans Still Have Excess Pandemic Savings
Americans outside the wealthiest 20% of the country have run out of extra savings and now have less cash on hand than they did when the pandemic began, according to the latest Federal Reserve study of household finances.
For the bottom 80% of households by income, bank deposits and other liquid assets were lower in June this year than they were in March 2020, after adjustment for inflation.
All income groups have seen their balances decline in real terms from a peak in 2021, according to the Fed survey. But among the wealthiest one-fifth of households, cash savings are still about 8% above their level when Covid hit. By contrast, the poorest two-fifths of Americans have seen an 8% drop in that period. And the next 40% — a group that roughly corresponds with the US middle class — saw their cash savings drop below pre-pandemic levels in the last quarter.
Can You Have Excess Savings?
No, not really, unless you believe you can have too much money.
However, note the definition used for these charts: “Defined as the difference between actual savings and the pre-recession trend—relative to previous recessions.”
In that sense, the above discussion makes sense.
If excess savings are dwindling, one would expect to see consumer spending decline or credit card debt rise.
Revolving Consumer Credit in Billions of Dollars
Stunning Steepness in Credit Card Debt Accruals
The speed at which consumers are going into credit card debt is stunning.
It’s hard to maintain lifestyles with rising inflation unless wages keep up.
The BLS and Fed believe the rate of increase in inflation is falling. Assuming the data is correct, consumers are struggling anyway.
For discussion, please see Consumer Credit Growth Plunges in July With Huge Negative Revisions
BEA Revises Spending Lower, Income Higher, With GDP Unchanged for 2023 Q2
As additional supporting evidence for the dwindling excess savings theory, the BEA revised real personal consumption expenditures (PCE) for the second quarter steeply negative from 1.7 percent to 0.8 percent.
The PCE spending downgrade happened despite upward revisions to income.
For discussion, please see BEA Revises Spending Lower, Income Higher, With GDP Unchanged for 2023 Q2
it’s reasonably safe to assume that excess savings, as defined, has been spent. What hasn’t by now been spent is in the hand of people who prefer not to spend.
The chart of household incomes 0-40 percent reflects the accumulation of actual stimulus checks sent. Plus any delay if reoccurring monthly debt. The increased excess savings in higher income brackets is the result of greater household wealth from inflated asset prices, such as home value and stock prices – savings realized after individuals had sold their property. The article fails to mention the underlying fiscal stimulus. Which was the Fed’s historically low interest rates. This began in 2019, well before the pandemic. Powell began buying Treasuries and corporate debt, eventually at $120B per month, or $1T every 8 months. Pushed long rates to historic lows, inflating asset prices, discouraging savings – while stimulating spending and borrowing. This was the stated intention of the Fed’s zero rate policy. ZIRP actually began in 2014, when Yellen became Chairman and took rates back to the lows of the mortgage crisis. Consumers have had a decade of low rate stimulus and become addicted to spending their perceived increase in household wealth.
1) The econ war against Germany cont after WWI. The Fed 90 days Good Will
banknotes were phased out by the Wilson administration in favor of gov treasuries to finance the war.
2) Good Will Notes vol was down. The clearing houses were shut down.
German workers were not paid. German businesses had to borrow from banks at hyperinflation rates. The German econ collapsed.
3) A few years later, in 1929, the Dow collapsed.
4) In the 70’s banks accepted 90 days promissory notes, but the risk was too high.
“Excess savings” is a neat measure, but definitely Keynesian hokum when you consider the insinuation.
What concerns me is that we basically have what could be seen as a “melt up”. High prices, pockets of extravagance, but some seriously concerning underlying dysfunctional fundamentals in the mix (cost to service national debt, debt levels at the consumer, state, and federal level).
Eventually, many nations are going to have admit all or one/two things: sovereign debt levels don’t matter (will severely undermine faith in fiat currencies across the globe, but allows CBs to keep interest rates higher for longer), “targeted” inflation rates will need to be re-adjusted (as Mish has often implied), huge amounts of defaults by governments.
The last one most likely will never happen outright with a major power. You’d probably see a partial default or 300 year bond before a full default.
At the consumer level, I would imagine we’d see some increases in personal bankruptcies. I don’t see how the average consumer can pay off credit card debt at 23-28% interest.
I think personal bankruptcies, people who default on student loans and people who didn’t pay their rent during the pandemic are going to have a significant impact on the economy. They’ll have a hard time getting credit to rent and/or buy a car and will lead to lead to multiple families living together.
In “The General Theory of Employment, Interest and Money”, John Maynard Keynes’ opus “, pg. 81 (New York: Harcourt, Brace and Co.), gives the impression that a commercial bank is an intermediary type of financial institution (non-bank), serving to join the saver with the borrower when he states that it is an “optical illusion” to assume that “a depositor & his bank can somehow contrive between them to perform an operation by which savings can disappear into the banking system so that they are lost to investment, or, contrariwise, that the banking system can make it possible for investment to occur, to which no savings corresponds.”
In almost every instance in which Keynes wrote the te.rm bank in the General Theory, it is necessary to substitute the term non-bank in order to make his statement correct, viz., the Gurley-Shaw thesis.
The Ph.Ds. don’t get it. Banks don’t lend deposits. So, all bank-held savings are frozen until their account owners so decide.
Take George Selgin: July 20, 2017
“This is nonsense, Spencer. It amounts to saying that there is no such things as ‘financial intermediation,’ for what you claim never happens is precisely what that expression refers to.”
Considering the change in the composition of the money stock, the economies’ momentum was predictable.
See Dr. Philip George’s “The Riddle of Money Finally Solved”
link to philipji.com
“For nearly a century the progress of macroeconomics has been stalled by a single error, an error so silly that generations to come will scarcely believe that it could have persisted for as long as it has done.”
George: “The logic was that such precautionary holdings are not intended to be spent and hence do not qualify as money.”
…
It’s stock vs. flow.
I dunno. The slope of the real increases in revolving credit pre vs. post pandemic is not THAT different.
DXY is up to 107. USDJPY = 150 testing Oct 2022 high, when the Dow plunged.
Demand for DXY is rising. Winter 2024 is next.
1) Gravity with the US pulled Japan’s long duration up :
Japan 3M = (-)0.3 // 1Y = (-)0.045 // The 10Y = 0.742 // 30Y = 1.62.
US10 – Japan 10Y = 4.7% – 0.742% = 4%.
2) Inflation might be higher, but the long duration will be below inflation, negative.
US gov dividends might be NEGATIVE again in real terms.
3) FL rep Matt Gaetz do the math : $40T x (-)0.02 x 10 years = (-)$8T. // $8T/ 40T = (-)20% in real terms. Higher inflation will chop transfer money, the elderly and Shingle mums.
4) In an environment of negative rates businesses will invest.
Gov will confiscate your money. Stocks might protect u, RE might deflate in real terms.
Surprisingly, it appears to be a total mystery to many……….
Excess savings is a myth. We had excess savings in 2020 and 2021 but.inflation has eaten up all of that and more. Inflation continues to drain more savings. At some point there will be a slowdown in spending and further rise in unemployment that will feed on itself
High interest rates protect small businesses. GOOGL, NVDA and Meta cannot
swallow small innovation co, loaded with talent, as before.
The interest rate on business loans is a hurdle that any project (risk) must leap over by a substantial margin to make it worthwhile. This sounds like the Japanese delinma of protecting the currency or lowering rates.
1) When a big whale, like Warren Buffett, gives few pulses on high vol,
market makers might follow up. The guppies might imitate them and send the
market vertically up.
2) Trump tsunami lasted one year. Biden followed up with his trillions. US economy
might trend up for several years, after the jump. Or the plunge
SPX 12M : stalled in 2021 and flipped colors for three years. 2023, at this point, is an inside bar.
SPX 3M : the lowest red vol since 2005.
SPX 1M :
Even Bloomberg gets this wrong. Savings flowing through the nonbanks never leaves the payment’s system. But there is an increase in the supply of loan-funds (affecting interest rates), which lets the MMMFs purchase additional securities (where S = I).
How do you think the Treasury funded the 3rd quarter trillion-dollar debt issuance?
Atlanta GDP now’s latest estimate: 4.9 percent — October 02, 2023
Likely the “last hurrah”.
Large Time Deposits, All Commercial Banks (LTDACBM027NBOG)
link to fred.stlouisfed.org
As Dr. Philip George says: “The velocity of money is a function of interest rates” and “Changes in velocity have nothing to do with the speed at which money moves from hand to hand but are entirely the result of movements between demand deposits and other kinds of deposits.”
All monetary savings originate within the commercial banking system. The source of interest-bearing deposits is non-interest-bearing deposits. I.e., there has just been a shift in deposit classifications. And large CDs aren’t included in the money stock figures, but they are the result of bank credit creation (loans=deposits).
Excess savings theory for 10000, Alex.
a. A theory to support dropping interest rates to the basement forever to supposedly drain said savings?
b. BS by those who brought you the GFC to cover up their greed and incompetence?
I took some of my excess cash today and bought some oil stocks that were on sale! BTE, CPG, SGY, WCP and CHRD. Hard to resist bargains.
Though the best sale prices were back at the Covid lows.
Since then, here are some of the gains from those lows. Of course I did not buy any of these at the absolute lows. But I was close to the lows on a few of them.
OBE 5490%
NVA 5317%
ATH 4250%
CR 4064%
POU 3882%
CJ 2366%
MEG 2239%
BTE 2139%
WCP 1471%
ERF 1433%
PEY 1404%
CPG 1401%
CVE 1272%
BIR 1234%
BNE 1067%
GXE 1000%
KEL 982%
TOU 915%
HWX 908%
TVE 900%
AAV 946%
VET 803%
CNQ 796%
ARX 795%
IMO 715%
SGY 665%
Choo! Choo! Congrats. Was watching CNBC this afternoon and Rick Santelli threw down the gauntlet and said ten year rates can spike to 13.7%…yikes!
I bought back most of the calls I sold a few weeks ago today and raked in 50% to 60% profits on my trades. I will sell them again when oil spikes back up. Choo! Choo!
I am also nibbling at TLT and may take a huge bite if Santelli is right about the 13.7%
Don’t you mean TBT?
No, TLT, 20 year treasury ETF.
So, what you’re saying is once the yields spike to 13.7%, THEN you’ll take a huge bite of the TLT? Because at that point the TLT will have gotten crushed and it might make sense to buy it at its lows.
@HotTub
You have to ask yourself two questions:
1. Will interest rates keep going up forever?
If the answer to question #1 is yes then avoid TLT forever. If the answer to question #1 is no then proceed to question 2.
2. If rates aren’t going up forever, when will they peak and go down and how do I profit from it?
I can’t tell you when rates are going to peak but I believe they will go down at some point over the next year or two maybe three. The way I plan on profiting from this change in rates will be through dollar cost averaging TLT. I am buying $1k blocks every time it drops by a dollar and I will increase the amount to $2k then $4k when it drops below certain levels. My target (which could be wrong) is TLT at 70 ish. I can hold this a very long time and collect dividends along the way. I am not the only one doing this from the investing peers I follow and discuss.
Don’t trade on my assumptions, do your own due diligence. I have a ton of money and plenty to lose but I’ve done my risk analysis and this is part of diversifying my portfolio and strategy. And I will repeat, that I will likely hold this for a long time (10 years+).
Now isn’t asking better than criticizing and jumping to conclusions?
MPO is a ‘tard who doesn’t realize that bond prices and yields are inversely related. Oh, the hubris.
The only tards here are the people that don’t have millions of dollars to invest. You have no idea what I’m doing because you are a binary thinker, it’s a dead give away the way you make assumptions without asking any questions.
Gravity with DET10Y draged the US10Y down. US10Y – DET10Y = 1.78%.
In Nov 2018, when JP decided to phase out negative rates, it reached 3.5%.
That led to Xmas massacre Dec 2018.
You must be rich , TAX EM
“If excess savings are dwindling, one would expect to see consumer spending decline or credit card debt rise”
Reason my debt is rising is everyone keeps sending me credit cards with rebates and 12-18 months no interest on hefty limits.
So I use those to pay my bills, cash into 5% interest payers, then either pull it and pay off the balances when due or roll it over to another card.
Outfits keep paying me to take their money, who am I to refuse?
I admit I drained all of our savings. I bought CDs with the money.
It’s just as easy to buy US Treasury bills as it is to buy CDs. The difference is that CD income is taxable at the state level, but Treasury bill income is not.
and at least lately rates are higher for shorter durations. until something changes the 4w tbill is great.
The stimulus money was direct payments to everyone under income levels, direct payments to people with children under income levels, enhanced unemployment benefits. It’s safe to say the top 20% didn’t get any of that. Eviction moratoriums, probably on net hurt the top 20%. Forgivable loans to businesses could have made it’s way into the hands of the top 20%.
I would say for the most part, the top 20% only benefited from the soaring equity and real estate markets, not any direct payments.
It taught me to never pay down my loans in case we have another emergency and they start forgiving loan payments again.
I’m also paying myself with retained earnings and reducing my regular income just below $150,000 so I qualify for stimulus.
Top 20% have been crushed in retmt savings because on the average, they had balanced portfolios of 50-60% stocks & 50-40% bonds, which lost 20-25% last year and haven’t significantly recovered.
Thanks for clarifying Mish. I’ve always wondered who has all this excess savings since I never had any.
“The speed at which consumers are going into credit card debt is stunning.”
The truly stunning thing is credit card rates are approaching 25% to 30% for most people that don’t have pristine credit. The story is the same, defaults will start rising, people will hit the skids and the Fed will come to the rescue by cutting rates then we’re off to the bubble again. If things get bad enough, more QE to the rescue!
The only thing left to do now is position in the right stocks, real estate, and other investments to ride to the moon.
Wish I was as optimistic as you are.
“Now” is not the time (IMO) to overweight the “right” stocks and real estate for ppl getting near or IN retmt.
I’ve underweighted stocks and reits, and shifted some domestic stock fund money to two stock funds in India, as some smart longtime guys have suggested (R Dalio & PD Jones).
The right time is after huge sell offs, black swans and other calamities. “Be greedy when others are fearful, be fearful when others are greedy.”
I’m sifting through the bargain bin right now. I am nibbling at TLT, MO, DFS but TLT is my favorite. There is far too much binary thinking here where someone must go all in or be all out. It seems people here are incapable of moderating their thinking or activities. The bulk of my money is in T-bills right now with oil stocks second and I’m slowing moving it to some other stocks I like.
And of course collecting dividends and selling calls on energy stocks, that’s where the real money has been the past quarter.
Ppl near or in retmt need to be more careful NOW than usual, maybe 25% stocks rather than 50%. I like BRK-B, XLE, , an India stock fund, QQQ, to round out the funds. Commods funds, GBTC, ETHE, some gold IAU, silver SLV, and uranium and plenty of 90-day TBills rebuying every qtr. Be careful if ur near retmt and have less than $3M
Fire burn and caldron bubble.
Cool it with a baboon’s blood,
Then the charm is firm and good.
This may be somewhat niche, but one input to the excess savings glut that still has some residual impact, on the plus side, is savings from working from home as opposed to commuting. I would argue that the savings associated with this are far in excess of the federal government stimulus. Of course not everyone was able to work remotely but a lot were. This bump in disposal income still has legs, although a diminished one as more companies gravitate to 3 to 4 days in and 1-2 days remote and all the variations in between. Nevertheless, a certain segment of the population is obtaining disposable income gains from not having to commute. I did survey during Covid of the monthly savings for my staff not having to commute to NYC. The low was $250 month and the high was $800 per month. The average was $450.
Were there excess savings? Look at the bottom half or so. How many of these people ever had six months (or whatever, your call) income saved in the bank?