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Wednesday, October 27, 2021

There is a Huge Roll of American Money on Hand

#money #cash #Fed #business, #American #inflation #savings #economy $virus #banks #consumers

Recall that in Y 2008 the Fed pumped lots of cash into the financial system just as it has done year to stave off an economic collapse.

But, in Y 2008 that money mostly ended up in banks’ accounts at the Fed, now that money is going into Americans’ checking accounts.

When money is put it directly in The People’s accounts which happened this time because Fed support was matched by government stimulus the boost suddenly became very meaningful.

In the 3 months through May, the most liquid portion of the money supply, as measured by a gauge known as M1, spiked 26%.

That is 3X the amount posted in the corresponding 3-month frame in Y 2008 and is more than any full-year increase recorded in the 60 yrs that officials have been tracking the data.

The Big Q: Will Americans go out and spend that money as the country reopens for business.

The Big A: There are those who answer with a resounding yes and envision a boom in consumer spending in months ahead that will power economic growth and spark inflation in Y 2021.

But some others worry the exact opposite will occur, that Americans, unnerved by how the unemployment rate has soared during The China Virus, will opt to hoard that money as rainy-day savings and dampen the recovery.

Americans have more money on hand than they have in years. Recessions make people poorer.

But The Trump Administration and federal government has taken huge steps to replace lost income.

Since March Congress has approved more than $2.8-Y in aid/relief, including significant amounts sent directly to households, all while the country’s consumers have curtailed spending with retailers, restaurants and other businesses shuttered.

In April, the US personal savings rate rose to 32.2%. Before The China Virus in records that date to Y 1959, that number never exceeded 17.3%, and had marked 10%+ once since Y 1995.

Fresh monthly data from the Commerce Department last Friday showed the savings rate subsided to the still-lofty level of 23.2% in May.

Plus, companies facing deep uncertainty have drawn on revolving lines of credit to the tune of more than $200-B, according to the data. Little of that credit has gone to new projects or investments.

The flood of money has been made possible by the Fed’s aggressive response to The China Virus.

It purchased more than $1.6-T in Treasuries since early March, effectively financing more than 50% the government stimulus. Its emergency lending programs have also kept credit flowing to companies, sometimes directly and by reassuring traditional lenders that markets will stay liquid.

Further, central banks and governments in the world’s developed markets are printing and distributing money to prevent companies and families from going under. And in those places too as GDP falls, bank accounts have risen.

When and if those excess reserves get pushed into either M1 or M2, they will be going to be very potent, that is what is happening this time that did not happen during the Great Recession.

So, perhaps for the 1st time in over 20 yrs, we will see serious inflation.

And if we do see higher inflation that persists a structural change in the economy will happen.

Delayed purchases of homes and new cars are happening now the economy moves back to normal and consumer confidence rises.

Everything is being geared toward getting those who have come out on the right side of this to have the confidence to go out and spend.

Have a healthy week, Keep the Faith!

Paul Ebeling
Paul A. Ebeling, a polymath, excels, in diverse fields of knowledge Including Pattern Recognition Analysis in Equities, Commodities and Foreign Exchange, and he is the author of "The Red Roadmaster's Technical Report on the US Major Market Indices, a highly regarded, weekly financial market commentary. He is a philosopher, issuing insights on a wide range of subjects to over a million cohorts. An international audience of opinion makers, business leaders, and global organizations recognize Ebeling as an expert.   

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