How much “extra” cash is out there?

That question is a fixture of the post-pandemic macro reality.

The policy response to the global health crisis entailed, in many cases, aggressive fiscal transfers enabled by monetary policy. Critics suggested the overt nature of that “partnership” was a recipe for inflation.

Monetarism (an endangered ideology) enjoyed something of a renaissance when inflation accelerated in 2021, but it was (and will forever remain) impossible to say how much of the blame for runaway price growth rested with “too much money” versus “too few goods and services.” The former could be blamed on policy choices, but not the latter, or at least not as manifested in the kinds of acute shortages we now associate with the fallout from the pandemic (i.e., supply chain disruptions and socioeconomic shifts).

In any event, estimating how much pandemic largesse is left three years on is a parlor game of sorts, and not an especially fun one. As JPMorgan’s Nikolaos Panigirtzoglou pointed out, without apparent disdain for the sheer amount of ambiguity involved in these calculations (God bless him for his tolerance in that regard), “excess savings are not directly observable, nor is there a single accepted way of measuring them, and the measurement can be quite sensitive to what pre-pandemic trend assumptions are used to estimate the amount of savings that are in ‘excess’ of a normal or desired level of savings.”

That’s why I’ve never endeavored my own “proprietary” calculations: I don’t have the patience for it, particularly after seeing the official data on personal savings revised such that all previous attempts to estimate “excess” savings were rendered meaningless overnight in the US.

Fortunately, Panigirtzoglou does have the patience. In his latest, he looked at global cash relative to GDP (to get an idea about how much cash can support global growth going forward) and excess savings in the US (to assess the prospects for households to keep spending). Brief excerpts from his estimates are below.

Looking at cash relative to GDP can provide some indication of how much cash can support global GDP. This ratio has increased sharply after the onset of the pandemic, peaking in mid-2021 before unwinding nearly three-quarters of its rise relative to end-2019, which would suggest there is still space for cash to support GDP growth. That said, there has been a gradual rising trend in the ratio of M2 over GDP, and relative to the level implied by this trend much of the rise in global M2 relative to GDP appears to have been exhausted.

A second way of looking at excess cash is to look at excess savings post-pandemic. We simply take the average US personal savings rate as a share of disposable income in 2019 as a proxy for desired savings, calculate the accumulated excess savings from early 2020 onwards, shown in the blue line in Figure 4. The figure also shows how this proxy is affected by variations to the threshold for the desired savings level.

A third way is to try to model money demand in a more holistic framework and use that to estimate excess money supply. The most traditional motive for holding money is the transaction motive, which relates underlying money demand to nominal spending or GDP. The second motive is the portfolio motive, which relates money demand to nominal values of other assets such as bonds and equities. The third driver of money demand is related to the precautionary motive for holding money, which is driven by uncertainty. These three drivers for money demand are brought together in one holistic framework in Figure 7, which estimates money demand as a function of the three motives mentioned above.

It suggests that the build-up of excess liquidity peaked in mid-2021, and that since then around 85% of this excess liquidity has since been unwound. In other words, the model suggests that much of the excess liquidity that built up after the pandemic has been unwound, though around 15% remains.