In response to the Covid-19 outbreak, monetary policy and fiscal policy have striven to safeguard the nominal incomes of households and businesses. At the same time, lockdowns and the shock to confidence have prevented households and businesses from spending as much money as they used to. As a result, the money balances held by private agents, first and foremost the balances held by households, have increased, in the EMU, by EUR 715 bn during the four quarters to Q1 2021. In the US, they have increased by EUR 1,784 bn during the four quarters to Q2 2021.
According to many an analyst, such an unusually large increase in privately held money balances indicates excess saving. The argument follows that when people tap into their savings, which they will inevitably do to correct the current excess, money balances will fall, unleash pent-up demand and a strong recovery will ensue.
As a matter of fact, one could (and actually should) deepen the excess saving argument by better distinguishing the two components of what laymen as well as some experts loosely call saving, namely:
• saving proper, or outlays other than consumption outlays,
• and (marginal) hoarding, or money not spent at all because it has been added to preexisting precautionary money balances.
If one hastily defines saving as that part of income that is not spent on consumption, one may be led to falsely believe that hoarding is part of saving, confusing money that is spent, but not on consumption, with money that is not spent at all. Focusing on the hoarding of precautionary balances, this investigation claims that the increase in outstanding money balances that inspires the excess saving argument systematically under- or overestimates the firepower set aside by private agents.
As a matter of fact, the excess saving argument underestimates by about 20% the quantity of money withdrawn from circulation and set aside by people in response to the Covid-19 shock. Saving proper has not really increased, but hoarding has, and much more than suggested by the cumulative increase in aggregate money balances since Q1 2020. Relevant to the growth and inflation outlook is the fact that the excess saving argument also underestimates the challenge of unleashing the purchasing power that people have stored for rainy days. The unlocking of hoarded money balances is not as straightforward as assumed by those who let the money supply alone guide their inflation expectations, at the risk of ignoring the demand for money. If people now held money balances above and beyond what they desire to hold, they would strive to get rid of excess liquidity and money velocity would increase. This has yet to happen. If there is something for policy to deter, it is hoarding; and if there is something to stimulate, it is saving.