E Business And Households Amass Cash To Withstand The Pandemic

In the 1930s Keynes introduced the notion that one of the most important components of the demand for money was the need to hold cash balances for contingency purposes, also known as liquidity preference. Keynes introduced the concept that uncertainty is one of the prime reasons for holding cash. Excess preference for liquidity was one of the underlying reasons why he argued that economies failed to achieve full employment. At times like this, with a resurgence of COVID-19, liquidity can be prized above all else. Starting in the second quarter of 2020, incomes started to drop like a stone, and then emergency government transfer payments went into action and mitigated much of the fall in personal and business income. Nonetheless, consumers held back purchases of services and, to a lesser extent, of goods. While economies were simply whipsawed between falling incomes and government support programs, the savings rate soared.

In Q2 the US savings rate ballooned to 33% and in Canada to 28%, compared to the historical average rate of around 4%. In Q3, the savings rate has fallen back to approximately 14% in each country. Current indications are that the rate will remain at that level for the balance of the year while consumers remain cautious. Evidently, consumers are paying down some credit cards and other consumer loans ( foregoing consumption). Interestingly, it is the rise in cash deposited in commercial banks that can account for much of the jump in the savings rate.

A recent CIBC report on Canada revealed that households’ cash deposited in chequing and savings accounts in Canada rose by 12% y/y. The CIBC estimates that this excess cash is by far the largest on record and is equivalent to 4% of consumer spending. Considering the paltry rate of interest offered by the banks, this growth is even more dramatic, especially since most of the deposit growth is in the form of non-interest- bearing chequing accounts. The CIBC economists also identified that cash was king for Canadian businesses, which are now growing their cash positions by close to 15%  y/y.That growth is coming from operating accounts, which are experiencing a 30% y/y pace of growth in Canada.

1 2
View single page >> |
How did you like this article? Let us know so we can better customize your reading experience.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.
Arthur Donner 8 months ago Contributor's comment

Excellent piece Norman. A lot of household spending power, if confidence is resumed.

My guess is that even when the real economy has a bit of momentum, consumer confidence will continue to be dicey since there are so many difficult challenges in the environment to digest -- job security, investment and pensions, etc.

The comment was deleted!

Norman Mogil 8 months ago Author's comment

So far the banks have been able to attract deposits. The alternative for safe keeping is short-term government debt which is a near- form of cash.

The longer-term problem is insufficient spending and too much saving which holds back economic growth.