Big PictureEconomics

Covid has caused a savings glut and an asset bubble

29 Sep 2021 3 month(s) ago

Savings deposits are soaring world wide, and the signs of a bubble in asset prices are everywhere. Not exactly what you would expect from an economic 'crisis.'

Something very odd has happened during the ‘pandemic’. It seems that savings and household net wroth in many parts of the world economy have soared. Globally, according to the AFR, people have stockpiled an extra $US5.4 trillion ($7 trillion) of savings since the coronavirus pandemic began.

“Households around the globe accumulated the excess – defined as the additional savings compared with the 2019 spending pattern and equating to more than 6 per cent of global gross domestic product – by the end of the first quarter of this year, according to estimates by credit rating agency Moody’s.”

Bank deposits in Australia have soared, which certainly reduces the risk for the local banks. They have sharply increased their funding from local deposits, and they have to pay next to nothing on them as well.

Australia Total Deposits were $US2.54 trillion in Jun 2021, which is more than the value of the stock market and closing in on the value of superannuation. From 2004 to March 2021 the average bank total deposits was $US1.99 trillion. The banks are swimming in cheap money, in other words, and people are keen to put their money in the banks as savings rather than look elsewhere to invest.

The same sort of anomalies are appearing across the world, where bank deposits are soaring. Bloomberg says:

“Consumers in the world’s largest economies amassed $US2.9 trillion in extra savings during Covid-related lockdowns, a vast cash hoard that creates the potential for a powerful recovery from the pandemic recession.

“Households in the U.S., China, U.K., Japan and the biggest euro-area nations socked money away when forced by the coronavirus to stay home and out of the shops. They are likely continuing to do so as restrictions remain and governments dole out stimulus.

“Half that total — $US1.5 trillion and growing — is in the U.S. alone, the data show. That’s at least double the average annual growth of gross domestic product witnessed in the last expansion and equivalent to the annual output of South Korea.”

US household net worth has also soared, which is not something you would expect in an economic crisis:

As an article Zero Hedge explains, this is a financial fiction, a massive asset bubble as a result of money printing:

“While we were digging through the data for today's household net worth report we stumbled upon something that seem beyond ridiculous: the ratio of Household Net Worth to Disposable Net Income. At 786% in the latest quarter, the chart at first appears to be a mistake but we triple checked it, and... well, here it is.

This number is so ridiculous, it is almost 50% higher than the long-term average of 540%. More importantly, it means that the total net worth number we reported earlier today, which in Q2 hit a record high of $142 trillion, is massively inflated on the back of what is obviously the biggest asset bubble on record.

“It also means that if one were to strip away the asset bubble, and net worth was purely a reasonable function of disposable income, then total net worth would be haircut by 31%, or some $43 trillion, which incidentally, is equivalent to the net worth of the top 1% of US society...”

What are the implications? One is that fears that inflation might appear are somewhat late t the party. There has not yet been out of control consumer price inflation yet, but asset inflation is at absurd levels. In Australia, that mainly means housing. Still, with such high levels of deposits in the banks, people will have some kind of cash cushion if that bubble bursts.

It is always important to remember that you only realise a loss on an asset when you sell. That is one reason why asset inflation is so hard to measure even when it is absurdly obvious – because economists can only meaningfully measure transactions. They cannot assess assets in the same way they consumer price inflation, where the transactions are continual. The transactions with assets are more irregular so go into the too hard basket.

But an asset bubble and a savings glut it is, and it will eventually have huge consequences. Those in Australia who have their money earning next to nothing in the banks might do well to look to other savings vehicles, including super.


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