America's "Excess Savings" Are Going Away. Inflation Is Not.
Americans at the upper end of the income distribution accumulated windfalls of bank deposits and other money-like claims that were then used to pay outsized capital gains taxes.
I recently had the chance to join The Prof G Pod with Scott Galloway to talk about everything from Trade Wars Are Class Wars to the banking system’s recent issues to historical amnesia about the (perceived) technological and economic prowess of the Soviet Union. Check it out!
I will be off next week (mostly) for the July 4th holiday, but I will be publishing a special note to celebrate two years of The Overshoot. And now for the main event.
Americans saved about $2.1 trillion more than would have been expected in the first 15 months of the pandemic. As of May 2023, the value of these “excess savings” accumulated since the start of the pandemic was worth less than $600 billion, and the entire total will probably be gone by the end of the year if current trends persist.1
What was the impact of this additional unexpected saving and subsequent dissaving? What might the impending disappearance of the “excess” mean for consumer spending, inflation, and real growth?
The available data suggest the following:
Most of the additional saving was done by households at the top of the income distribution, mostly by expanding their holdings of liquid assets
Most of the apparent dissaving has been attributable to abnormally high capital gains tax payments and abnormally weak growth in income from assets, both of which are consequences of companies’ choices to prefer buybacks over dividends
With the exception of the early stages of the pandemic, consumer spending has largely moved in line with wage income
All of this means that the imminent disappearance of the accumulated “excess” will likely have little impact on either growth or inflation, with measures of underlying inflation implying that prices are still rising about 2-3 percentage points faster than before the pandemic thanks to robust nominal wage growth