Don't Bank On the Glut of Savings Being Spent
Consumers finally have a cash cushion that they will be hesitant to deplete as the pandemic lingers.
Consumer savings have boomed.
Photographer: Bloomberg
There is no shortage of market participants who are looking for a resurgence of inflation. They point to all the money piled up that U.S. consumers can spend as soon as the economy fully reopens. Bank deposits have leaped from $13.2 trillion at the end of last January to $16.1 trillion at the end of 2020. At 12.9% in November, the household saving rate was double the pre-pandemic level. If it fell back to normal levels, consumer spending would surge by about 6% and boost gross domestic product by four percentage points.
Not only that, but the velocity of money, or its turnover in relation to GDP, nosedived from 1.43 in the fourth quarter of 2019 to 1.15 in last year’s third quarter. This, too, suggests plenty of unused liquidity to fund spending. Banks have oceans of money to lend as shown by their reserves at the Federal Reserve, which soared from $1.66 trillion in January 2020 to $2.92 trillion in December.