Even If Everyone Spends All Their ‘Extra’ Money…

In the US, some folks (with Larry Summers being perhaps the most famous, and certainly one of the most vocal, examples) are concerned about an economic overheat.

One part of that thesis revolves around the notion that if vaccination rollout goes as planned and the economy is able to reopen at “100%” (i.e., Texas style), the accumulated savings built and maintained during the pandemic will be rapidly spent, an eventuality some suggest could be “dangerous” or otherwise inflationary.

Lower-income households demonstrated that their savings buffers were subject to being run down in the absence of ongoing stimulus, and with the services sector still only partially open, “millions of displaced workers are effectively living stimulus check to stimulus check,” as BMO’s US rates team put it Wednesday.

In January, the boost from stimulus was readily apparent in personal income and spending figures, not to mention retail sales.

Read more: Here’s What Stimulus Did For Incomes In January

So, what if stimulus critics’ “worst” fears were realized? What everyone, everywhere, suddenly spent every dime of surplus savings into the economy?

Well, at least according to TD’s James Rossiter, Head of Global Macro Strategy, the labor market would still admit of slack.

“Cumulative excess savings over 2020 are approaching 8% of GDP in some countries,” Rossiter wrote, in a noted dated March 2. “If all those savings were spent by optimistic consumers over the course of a year, it would give GDP an unprecedented boost.”

In order to get a handle on what might happen in the event surplus savings do indeed inundate economies, TD conducted what they described as a “generous” exercise using Okun’s Law.

If the labor market “responds in a historical fashion” to a GDP boost of “unprecedented” size, Rossiter suggested it’s still far from clear that the labor market would be totally healed. “Even if all savings are spent, unemployment rates would remain higher than their pre-COVID levels, indicating continued slack,” he said.

Of course, “all” surplus savings most assuredly won’t be spent. It depends on households’ marginal propensity to consume, something discussed at length here last weekend in “Free Money And What To Do With It.”

Further, who’s to say the pandemic didn’t forever alter consumer psychology at least at the margins? You don’t have to posit a far-fetched scenario where Americans (for example) become a nation of frugal savers (versus instant-gratifying spendthrifts) to imagine a scenario where the savings rate resets at least a bit higher than it was pre-pandemic. And you don’t have to imagine a permanent services sector apocalypse to think people might at least pause before going to a movie theater or going out to dinner once the initial pent-up demand and “cabin fever” abates.

TD addresses those issues in a separate, longer note. “Households may be saving more because they are more uncertain about the future,” the bank said, adding that “in this scenario, households may feel justified in increasing their ‘rainy day’ pots, and possibly continue saving at a higher rate.” Moreover, it’s conceivable that households will continue to see excess savings as an opportunity to deleverage.

All of the above suggests a real “overheat” is unlikely.

“Worries about accelerating inflation, bubbles, and the necessity of higher yields implies policymakers have overshot [but] it’s impossible to know precisely how much stimulus was needed until long after the fact,” BMO’s Ian Lyngen and Ben Jeffery said Wednesday. “Put differently, if COVID disappeared tomorrow, then there is too much stimulus; if the economy is still in lockdown on New Year’s Eve 2022, there is not enough stimulus.”


 

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5 thoughts on “Even If Everyone Spends All Their ‘Extra’ Money…

    1. And, assuredly, street alcoholics will start consuming additional lagers, on the margin, of course. Alcohol and aluminum can demand soars. Overheat.

      Nearby, the junkies will change their behavior on the margin, consuming more needles, as their preference shifts to wanting to use fresh needles over saving and reusing needles. Demand for plastic for plungers and steel for needles will skyrocket. Overheat.

      And the people living in tents in the nearby parks. Their preference will shift on the margin from wanting to live in a tent in a park full of squalor to preferring to live in a permanent dwelling with sanitation. Demand for low-cost housing will soar. Overheat.

      More and more we’re just coasting, living off the infrastructure and nice things (what few we ever had) that earlier generations built, stuff, like like civil society, that we don’t have the good sense to value and maintain for those who come next.

      Thank goodness we have Mr. Summers for we would surely be a broken nation without his wise and abundant bloviation.

      1. Especially since even a lot of fairly well off households… savings is a relative term. If you have $15k in credit card debt, $50k in college debt, $20k in vehicle loans and $5k in a savings account just in case you lose your job tomorrow… is that something you’re likely to dump into consumption the moment that covid restrictions end?

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