Executive Summary
“Excess savings” is defined as savings above the pre-pandemic trend level. The Federal Government and Federal Reserve through stimulus programs and money printing sent checks directly to citizens during the pandemic. As one can see in the first graph, “excess savings” skyrocketed – as did inflation. One can see in the second graph the flip from accumulating savings to draining savings. According to a Bankrate.com survey, over 50% of citizens surveyed have less than three months’ expenses in savings. A Fed survey revealed 37% of Americans cannot cover a $400 emergency with cash. With the consumer hurting and 70% of GDP from consumption, GDP should be negatively impacted. Government spending accounts for 23% of GDP. However, due to government deficits any government increases will be financed through more debt.
Please continue to The Details for more of my analysis.
“It is axiomatic: When there is no penalty for failure, failures proliferate.”
–George F. Will
The Details
In hindsight, it is obvious that the Federal response to the pandemic was excessive. The unprecedented stimulus and subsequent deficits have increased total Federal debt by $11 trillion. To assist in financing this massive debt, the Fed, through its Quantitative Easing program, purchased trillions in Treasury securities and Agency debt. The Fed’s balance sheet skyrocketed by $5 trillion from the start of the pandemic to its 2022 peak of $9 trillion. This incredible surge in liquidity provided record levels of “excess savings” for citizens. “Excess savings” is defined as savings above the pre-pandemic trend level. Notice in the graph below from the Federal Reserve, excess savings peaked at $2.1 trillion in August 2021. Since then, consumers have completely depleted the excess savings accumulated.
Note: Excess savings calculated as the accumulated difference in actual de-annualized personal savings and the trend implied by data for the 48 months leading up to the first month of the 2020 recession as defined by the National Bureau of Economic Research.
Source: Bureau of Economic Analysis and authors’ calculations.
The graph below shows the flip from accumulating to draining excess savings, in 2021.
Note: Excess savings calculated as the accumulated difference in actual de-annualized personal savings and the trend implied by data for the 48 months leading up to the first month of the 2020 recession as defined by the National Bureau of Economic Research.
Source: Bureau of Economic Analysis and authors’ calculations.
A significant side-effect of providing excess savings is the dramatic rise in inflation, caused by the massive increase in the money supply. The impact of rising prices and high interest rates has forced consumers to spend down their excess savings. Many are now using their credit cards and other debt facilities, such as “Buy Now, Pay Later,” to make ends meet.
The situation is becoming dire as shown in the graph below from Bankrate.com. When asked about their level of emergency savings, over 50% surveyed stated they either had no emergency savings or had less than three months’ expenses saved.
Even more shocking, in a survey by the Fed, 37% of Americans said they could not cover a $400 unexpected expense with cash (or a cash equivalent).
The impact of the depletion of excess savings, rising prices and high interest rates is that consumers are now spending less money. This pullback in spending is severely affecting the retail industry. As stated in an article from CBS News, “The retail industry is going through a tough time as it copes with inflation-weary consumers and a rash of bankruptcies, prompting chains to announce the closures of almost 3,200 brick-and-mortar stores so far in 2024, according to a new analysis.
That’s a 24% increase from a year ago, according to a report from retail data provider CoreSight, which tracks store closures and openings across the U.S.”
Consumer spending makes up almost 70% of gross domestic product. The drastic reduction in spending is certain to have a significant impact on GDP growth this year. Absent more stimulus – which would then increase future inflation – the only way to juice GDP growth is through government spending, which comprises about 23% of growth. However, with the government running deficits of over $1 trillion, any additional spending in attempts to boost GDP growth would require an equivalent amount of new debt. That is like a family attempting to show they were financially strong by how much they spend, even though they had to borrow the funds to finance the spending. It’s ludicrous. The consumer is now tapped out, and the impact will be seen in economic growth.
The S&P 500 Index closed at 5,305, flat for the week. The yield on the 10-year Treasury
Note rose to 4.47%. Oil prices dropped to $78 per barrel, and the national average price of gasoline according to AAA remained at $3.59 per gallon.
© 2023. This material was prepared by Bob Cremerius, CPA/PFS, of Prudent Financial, and does not necessarily represent the views of other presenting parties, nor their affiliates. This information should not be construed as investment, tax or legal advice. Past performance is not indicative of future performance. An index is unmanaged and one cannot invest directly in an index. Actual results, performance or achievements may differ materially from those expressed or implied. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy.
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