Peter Warburton – February 25, 2021
As the US legislature prepares to throw its citizens another US$775bn in cash payments, it is reasonable to ask whether the new administration has thought this through. Despite the pandemic, personal incomes rose by 6.3 per cent last year, buoyed by a 36 per cent uplift in current transfers. The fourth quarter personal saving rate of 13.4 per cent remains 6 full points higher than a year ago. As consumers prepare to resume a wide range of activities that necessitate physical movement, nominal income and spending growth will converge on the explosive rate of M2 money supply growth. The collapse in the velocity of money (jump in the saving rate) has reflected a deficit in personal mobility. As social and travel activities resume, the plunge in money velocity will stabilise and partially reverse. Adding more fuel to the fire looks like a dangerous misjudgement.
John Greenwood and Steve Hanke, writing in the Wall Street Journal this week, highlight the 26 per cent annual increase in the US M2 definition of the money supply, the largest percentage increase since 1943. They comment, “the looming danger for the economy isn’t only that the monetary printing presses have been in overdrive since the pandemic began, but also that they are already set for the same in 2021.” They observe that bank reserves, currently US$3.2trn, will increase by about US$1.4trn simply from Fed purchases of Treasuries and mortgage-backed securities, and that the US Treasury plans to run down its Treasury General Account by about US$820bn in short order. This would equate to a further 12 per cent monetary expansion in 2021.
Upward pressure on wage inflation in recent months has been discounted as a statistical distortion caused by the disproportionate impact of lockdowns on low-paid workers. However, the weekly earnings data do not bear this out. Median weekly earnings for all US workers rose by 5.2 per cent in the year to the fourth quarter: 4.9 per cent for men and 6.2 per cent for women. By race, Asian workers achieved an increase of 8.1 per cent; Black or African American, 4.8 per cent, Hispanics or Latinos, 4.2 per cent and Caucasians, 4.1 per cent. Service occupations achieved a 4.2 per cent uplift.
As the US emerged from the Great Financial Crisis, the sharp fall in M2 money velocity in 2009 was replaced by a modest recovery in 2010. The trend decline in velocity, of around 2 to 2.5 per cent per annum, resumed thereafter. Surely, there is reason to expect an even more spirited recovery in velocity as Americans shake off the lockdown blues and some kind of driving season gets underway. The combination of further double-digit money supply growth with stabilising velocity suggests that personal income growth, which reached 10.7 per cent annual growth in the second quarter of 2020 will surge well above 10 per cent in 2021. Whereas in 2020, the saving rate spiked, as the vaccine outpaces the virus, the saving rate will fall back. The mere thought of introducing another massive fiscal stimulus – comprising direct payments to households ($422bn), unemployment benefit provisions ($245bn), increased child tax credits ($109bn) and a federal minimum wage increase ($45bn) among other items – beggars belief. Yield curve control? Don’t bank on it.
Figure 1
Source: FRED and projections for 2021 and 2022
Figure 2
Source: Berenberg Economics
Figure 3
Source: MTA