Vijay Kumar Gaba

 A Newsweek story couple of weeks ago (see here) highlighted that Americans may not be splurging the $1400 stimulus checks given by the Biden administration. As per the story, a survey has found that “Americans are generally saving about 42.6% of the third federal stimulus payments, up from 37.2% and 36.4% of the second and first stimulus checks respectively”. It is pertinent to note that the latest stimulus payment of $1400 is larger than the first two, which were $1,200 and $600 respectively. The Survey also finds out that little over one third of the latest payment has been used to repay debt, as compared to 37.4% and 34.5% respectively for the previous two stimulus checks.

This data could be interpreted in different ways. The most common interpretation is that the recipients may be saving the money to get some more clarity on the Covid-19 conditions and come out in hoards to spend in next couple of years (2022-2023). Few are interpreting it as harbinger of a structural change in the US consumer behavior. It is suggested that the shock of global financial crisis (GFC, 2008-09) and Covid-19 may result in curtailment of overspending habits of average American.

(The following is with inputs from www.zerohedge.com)

In its latest earnings report, JP Morgan drew attention towards another dimension of this phenomenon. The bank highlighted that “in Q1 its total deposits rose by a whopping 24% yoy and up 6% qoq to $2.278 trillion, while the total amount of loans issued by the bank was virtually flat sequentially at $1.011trnn (down 4% yoy). This implies that for the first time in history, loans to deposit (LTD) ratio of largest bank in USA is below 50% for the third consecutive quarter. Similarly, at Bank of America, the second largest American Bank after JPM, the amount of total outstanding loans is below GFC levels, implying NIL loan growth for 12years. In fact, the aggregates at the top four US Banks indicate, no loan growth for past 12years while deposits have doubled in this period.

Prima facie, this divergence is unprecedented. Traditionally, loans and deposits have not diverged to this large extent. However, if we juxtapose this divergence to the unprecedented amount of money printed by US Federal Reserve (QE) in post Lehman era (2008), this divergence may not appear too blatant; for the amount of excess deposits accumulated over past 12years is approximately equal to the amount of excess reserves injected by the Federal Reserve in that period.

This obviously has changed the traditional paradigm that banks create money through extending loans and in the process fractional banking builds the reserves at Federal Reserve. This time Federal Reserve has created money and that money is lying in banks as deposits. The velocity of money has crashed to lowest levels. This is the primary reason why trillions of dollars in new money printing have not resulted in any inflationary pressure so far; even though the equity markets have been factoring in bouts of hyperinflation for more than a year now.

The question now is “how this situation shall get corrected?”

Many analysts expect the situation to revert to the traditional paradigm as Fed begins to taper in 2022. It is estimated that tightening of liquidity from Fed would force banks to lend aggressively, at a time when the deposits may be shrinking. A couple of years of aggressive lending and withdrawal of deposits will restore the balance in financial markets. The collateral would be higher interest rates and higher inflation.

I am neither an economist nor a research analyst. I am therefore not eligible to make an intelligent comment on this situation. Nonetheless, my naïve view is that this saving glut has only allowed QE to persist for so long; which means, QE has been nothing but a book entry to sooth the nerves of markets. The collateral of QE has been massive reverse transfer of wealth, from poor to the rich by way of wealth erosion for poor (joblessness, negative rates, asset price erosion) and disproportionate rise in wealth of top 10%.

In my view, this tiger ride (QE) will end only when the rider (excess saving deposits) perish. I am however not yet inclined to believe that this will happen the way it is popularly believed, i.e., Fed tapering, higher rates, inflation, aggressive lending and higher investment & consumption demand. I have a feeling it will happen through currency redundancy. The USD and EUR deposits may just become irrelevant over years, as new independent currencies become popular establishing a parallel global monetary system. The small savers will carry this cross, as has been the case always.