The Myth Of Americans’ ‘Extra’ Dollars

The Myth Of Americans’ ‘Extra’ Dollars

Part and parcel of most constructive takes on the US economy in 2022 is the notion that "excess" savings ("buffers," as it were) accumulated during the pandemic will be sufficient to buoy spending despite surging prices for gas, groceries and necessities. I'm dubious, but I prefer to express my skepticism more eloquently than other misanthropes, some of whom employ clichés and social media vitriol to inundate the public with divisive propaganda masquerading as macroeconomic commentary. To be
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5 thoughts on “The Myth Of Americans’ ‘Extra’ Dollars

  1. Spot on assessment in many ways. Though I would suggest a slight wrinkle to the argument in regards to disposable income and elevated savings. I think we have a longer runway which makes both the recession hawks and the no recession crowd correct. No recession now, but yes recession next year. And there is no way out, a recession will happen either 2023 or early 2024, it is merely a question of how bad and for how long.

    “One obvious problem is that most “extra” cash belongs, by definition, to people who don’t need it. If they needed it, it wouldn’t be “extra.” People for whom cash can be “extra” comprise a very small percentage of the populace.”

    I think this slice of the population is actually quite large at the moment, say, 50th to 85th percentile of income earners or 35% of American consumers. Talking to a few real estate agents in my area, Boston metro, people are willing to spend 25% over what it cost last year (already ridiculously high) to rent an apartment. And per the agents, these are mostly young professionals. So they don’t make enough to afford the rent, but they have the savings to pay for it, so they justify it as a necessity. They adjust down spending on some “stuff”, but not everything because as H says (I’m paraphrasing) they still need to live their lifestyle brand (everyone’s a brand these days, or at least they need to feel like it).

    If we think about elevated savings in the bank as a line-of-credit that one gives to oneself, as most of these people appear to be doing, we can see this excess lifestyle spending (mostly on “necessities”, which now cost more because of inflation) has a limited life span. Income allows one to spend at a certain level into perpetuity (theoretically), but financed spending has a limit and will eventually end. The end of consumer spending usually is presaged by exploding credit card balances. We’re not there yet, but the self funded lines of credit need to be “maxed-out” first.

    I see the end of the party coming some time next year. Real estate will likely crash a new possibly with a larger and longer dip than the GFC. Global real estate is teetering on a cliff and has much more systemic risk than anyone (important public facing economic/finance people) is currently talking about.

    1. This is a good comment. My initial reply was inadequate, so I removed it. I’m speaking to the same thing you are. The people I reference as having true “extra” cash aren’t financing their lifestyles with their savings because their savings are so vast that none of these considerations is a factor. So, for example, if you have $75 million, you have to try to go broke. Macro circumstances, in and of themselves, can’t break you, unless your fortune is levered to the macro (e.g., you’re an oil trader or something). The only way for someone who made $75 million in the normal course of business (i.e., making proverbial widgets) to go broke is by subsequently making objectively terrible decisions. For that cohort, cash is “extra” in the same sense that a kindly neighbor’s Thanksgiving leftovers are extra: “Do you want some mashed potatoes? Because I’ve got extra,” means she has more mashed potatoes than she can realistically store or consume by herself. I don’t know what percentage of the money economists are counting as “excess savings” is comprised of those kind of fortunes. It could be a large percentage or it could be a small percentage (especially to the extent anyone with over $100 million likely has untraceable accounts), but my point is just that whatever that percentage is, it’s irrelevant to the macro outlook because spending trends for that cohort aren’t necessarily correlated with inflation or any other macro variables. If someone from that cohort wants a Porsche, they’ll buy a Porsche. Inflation could be 1% or 10%, but they’re still buying the car. The decision isn’t based on the ebb and flow of the economy, it’s based on something entirely irrelevant — like a wider wheelbase or a new spoiler design. It’s everyone else that counts from a macro perspective and as you say, I just don’t know how much runway we have there. It could be three months, six months or two years, but it’s not indefinite because those savings (lines of credit, as you very aptly call them) can be maxed out. That’s where I was drawing my distinction. A $75 million “savings” account is basically an open-ended credit line. The only way to max it out is to do something totally ridiculous. For that cohort, cash is just “fun coupons,” as DiCaprio’s Jordan Belfort put it. “Extra” in the truest sense.

    2. I don’t see housing crashing but rather flattening because supply is scarce, demand is strong, and there is financing:
      – we’re just not building (and Boomers aren’t downsizing) at a rate to change the market dynamics
      – building during inflation, supply chain issues, and labor shortages is slow and expensive
      – remote working makes a big difference to some percent of the professional class but the Working Majority have to live near where there’s jobs, the existing limited land/infrastructure urban centers
      – Mortgages at 5% are still historically low

  2. I think a big chunk of the population of the US has no savings buffer, even now. I recall the long lines of cars that we saw early in the pandemic waiting for free food at food banks. You saw a lot of late-model cars that did not scream “I’m poor.” But most of those cars were only a couple of missed payments away from being repossessed. The thing keeping people afloat is that by and large, anyone who wants a job can have one–for now.

  3. I think it’s an important point that we don’t know what percentage of these savings are from the “rich.” Remember the “$400 emergency-expense data” survey?

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