Some things are obvious, but for various reasons, we choose to ignore them.
For example, one popular argument among those who harbor a constructive view on the prospects for the US economy in 2022 is the notion that “excess savings” accumulated during the course of the pandemic will support consumer spending.
Relatedly, some market observers are enamored with the notion that the $34 trillion gain in household wealth over the six quarters through Q3 2021 means Americans will feel emboldened to spend. After all, households are richer than they’ve ever been.
I abhor those arguments. But not because I think they have absolutely no merit. Many Americans own some stocks, and lots of Americans own a home, so a large segment of the population is, in fact, richer on paper. Generally speaking, that’s conducive to consumption, some of it conspicuous.
What’s bothersome about the “excess savings” and “wealth effect” arguments is the extent to which they mostly (and, in some cases, completely) overlook the only thing that really matters when it comes to everyday consumer spending — namely, that the least economically endowed members of society are,
- The least likely to have excess savings,
- The least likely to have benefited from rising property and stock prices, and
- The most likely to spend any incremental dollars that come their way
Do you see the problem with that? The people most likely to spend extra money are the people least likely to have any. And vice versa.
I feel compelled to repeat this over and over again. Apparently, it’s necessary because seemingly every day, someone makes one (or both) of the two arguments briefly outlined above, without so much as a polite nod to the fact that they’re not very compelling.
We have ample real world experience with this, by the way. You needn’t cite freshman economics textbooks, or otherwise use words like “marginal” and “propensity” to make the point.
The post-financial crisis experience was a case study in how inefficient the “wealth effect” really is. Stocks (and financial assets of all sorts) kept rising, but real economic outcomes weren’t commensurately robust. Why? After all, 56% of Americans own stocks, according to the last update from Gallup.
Well, because saying that more than half of Americans own some stocks tells us almost nothing of value. With apologies to Gallup, that’s a largely meaningless data point.
Think about it this way: Nearly 100% of Americans have some money. But inequality keeps rising because almost nobody (relatively speaking) has a lot of it. And, as the old adage goes, it takes money to make money.
Have a look at the following figures (below) from Goldman.
What sticks out to you? Hopefully, it’s the size of the bar labeled “Top” in the left-hand figure.
“We still see room for consumers to supplement their incomes by drawing on a larger share of their excess savings accumulated during the pandemic as well as wealth gains from increases in home and equity prices,” Goldman’s David Mericle and Alec Phillips remarked, while discussing the outlook for the US economy in 2022. After briefly laying out Goldman’s projections, Mericle and Phillips wrote that “the bulk of the excess savings still sit in bank deposit accounts, arguing for a high spend-out rate, but they are held mainly by the upper quintiles of the income distribution, arguing for a lower spend-out rate.”
It doesn’t get much more straightforward than that. Note particularly how large the light blue shaded area in the bar labeled “Top” is compared to the same area for the other four quintiles. The rich hold vastly more of their excess savings in “other assets” than do any of the other income groups. Those “other assets” likely offer a higher rate of return than bank deposits, unless the rich inexplicably decided to park it all in German bunds.
This harkens back to Thomas Piketty’s work showing how the average return on capital tends to rise the larger the amount one has to invest. That’s yet another manifestation of inequality of opportunity. If you want to see it in action, the figure (below, derived from Piketty’s data) serves as a poignant illustration.
That’s not a coincidence. And you can safely extrapolate it to individuals and households.
For Goldman, the concentration of excess savings in the accounts of the richest Americans means the bank expects the overall spend-out rate next year to be “moderate,” as opposed to voracious.
Of course, all of this feeds on itself. The rich don’t need to buy necessities, so they accumulate more assets instead. And the return on that invested capital tends to be larger the richer they are. Those returns are then reinvested in still more assets, making the original fortunes still larger, opening still more doors to even better investment opportunities. And so on, and so forth.
Finally, I’d reiterate that for (too) many Americans, the term “excess savings” is a ridiculous, not to mention insulting, misnomer.