The fiscal and monetary responses to the “coronavirus” created a surge in savings. While many hope those savings will go back to work, the “savings mirage” won’t save the economy.
In recent weeks, there has been a good bit of chatter about the surge in the “savings rate.” The rate has now jumped to the highest levels seen in the last couple of decades, suggesting the consumer is now “well-positioned” for a “consumption comeback.”
As Bank of America’s Michael Hartnett suggests, the consumer has the “ability” to finance the recovery.
The hope is that these “cash hoards” will eventually begin to flow back into the economy through increased applications for mortgages, autos, and durable goods. That increase in consumption will also lead to a decrease in the staggering $3.8 Trillion deficit by the end of the year.
Such is the “hope” anyway, and a point we discussed in our previous series on capitalism (Read Here).
“Deficits are self-financing, deficits push [interest] rates down, deficits raise private savings.” – Stephanie Kelton
On the surface, there does seem to be a correlation between surging deficits and increases in private savings.
However, the “savings rate” is a mirage, and like all mirages, they disappear upon closer inspection.