E Business And Households Amass Cash To Withstand The Pandemic

The US experience is similar as bank deposits actually grew slightly faster than bank assets. It seems that commercial banks do not have as much difficulty in attracting deposits as one would expect in a low-interest environment. Many believed that after the 2008 crisis, that liquidity preferences would result in the gradual disappearance of cash balances. Low-interest rates encourage investors to move away from savings deposits and into higher-yielding asset classes. Precautionary demand, once disdained, now is a major factor in inhibiting economic growth.

Figure 1 US Corporate and Household Bank Deposits

(Click on image to enlarge)

Lest we get too excited by the prospect that consumers will loosen their purse strings soon, much of these cash balance are held for pure precautionary reasons. The pandemic is far from being over; vaccines are still in the early stages of development; new lockdowns are being considered, and workers and business owners are trying to figure out what permanent changes will take hold in a post-COVID-19 world. Uncertainty may well be greater now than earlier in the year when savings were so high.

The CIBC report makes the compelling statement that “keeping cash positions at current levels is hardly optimal and is thus unsustainable”.  Nonetheless, we can expect that households and businesses will maintain elevated cash positions this winter, driven by so much uncertainty. The Keynesian precautionary demand for cash is very much alive and well.

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Arthur Donner 10 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.

William K. 9 months ago Member's comment

At least here in the USA the confidence in the government has been reduced a bit. My confidence in both the Fed and the outgoing president has been reduced quite a bit.

In fact, my thinking has been that we need another ballot choice for every office, that choice being "No Confidence, None of the above, get a different candidate." That addition would not tend to infringe on any personal rights, and so it may not even require a constitutional change.

Lack of any confidence in the adequacy or integrity of a political group or person can be very frustrating.

William K. 10 months ago Member's comment

Interesting indeed. And it should be obvious to all that with the times being very uncertain, and the imposition of lock-downs being very real, that there is no way an adequate income is certain. Thus the only choice is to have some form of available liquid assets, which so far includes banked savings. Of course the motivation to use the banks is dropping along with the interest rates. And with no cash placed into the banking system the banks will have nothing to work with. That does not bode well for the banks, does it?.

Norman Mogil 10 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.