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The Effect of COVID Stimulus Payments on Personal Savings, Inflation, and the Economy

christopher9364

Updated: Jan 1, 2024

It’s nearly impossible to underestimate the effect the three stimulus payments, coupled with extremely generous Unemployment Compensation (UEC), in 2020 and 2021 had on personal savings and the inflation rate. Each time the stimulus payments were made there were massive jumps in personal savings followed by spending sprees by the people who received them. The UEC payments, which frequently resulted in people making more from UEC than they did on their former job while simultaneously reducing their expenses, increased the individual’s ability to buy goods and services. The basic economic law of supply and demand dictates that as demand increases, the price goes up which, in turn, causes the demand to go down as a result of the higher prices. This didn’t happen because human nature dictates that we spend what we have and frequently more than we have, so the corresponding drop in demand never happened. Plus, this was “free” money, right?



It's clear that with each payment the amount of money in individual accounts spiked, to $5,976.4 billion after the first payment, $3,699.8 billion after the second payment, and $5,712.9 billion after the third, each time dropping precipitously as consumers spent their free money. Based on the Personal Savings before the checks were issued, the combined payments pumped $9.8 TRILLION into the economy with no corresponding increase in production. In fact, there was a reduction in the output of goods and services during this time (think vehicles and restaurants), decreasing the supply side of the Demand/Supply equation.


During the five years prior to the pandemic, the total of US Personal Savings, in inflation adjusted dollars, averaged $896.2 billion. During the 12 months from the first stimulus payment to the last, the average was $2,944.7 billion, and since the final payment the average has fallen to $775.2 billion, a 13.5% drop from the pre-COVID levels. What makes this more troubling is that the Personal Savings stands at $479.0 billion in inflation adjusted dollars, 46.6% lower than the long term average.


In the meantime, there doesn’t seem to be any abatement of the spendthrift ways of the US consumer. The US GDP for the 3rd quarter of 2023 came in at a blistering 4.9%, driven by a 4% increase in consumer spending. The Consumer Price Index for September 2023 rose 0.4% and Year Over Year inflation is 3.4%, well above the Federal Reserve’s target of 2%. On October 15, 2023, I made the contrarian prediction that the Fed would raise its rate at the meeting on November 1st, and that the S&P 500 would drop 5% as a result. While this prediction isn’t likely to come true, the bond market seems to be doing the Fed’s job for them with the 10 year Treasury Bill rising above 5%, which makes money more expensive to borrow. The S&P 500 is currently down 6.3% from its October 17th recent peak of 4,393.01. The higher bond rates, higher than anticipated inflation, fears that the Israeli-Hamas war will spill over into the rest of the Middle East, and the Fiscal Year 2023 deficit of $2 trillion are all taking their toll on investor sentiment.


Looking ahead, none of this bodes well for 2024. For over a year the Fed and other financial talking heads have been convinced that the economy will be able to pull off a soft landing where inflation gets under control without increasing unemployment. Discounting the COVID driven recession for obvious reasons, the last recession in 2008-2009 saw unemployment rise to 9.9% in the 4th quarter of 2009 before slowly falling to 4.0% in the 1st quarter of 2018, 8 years later. The current expansion of the economy is unsustainable and we could see the unemployment rate rise like it did in 2009. With consumers having virtually no cushion to weather the loss of income, the economy would go into a tailspin as rising unemployment cuts into consumer spending, leading companies to lay off more workers, and so on, until the landing becomes very, very hard. I hope I'm wrong.



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