(Bloomberg Opinion) -- There is no shortage of market participants who are looking for a resurgence of inflation. They point to all the money piled up that U.S. consumers can spend as soon as the economy fully reopens. Bank deposits have leaped from $13.2 trillion at the end of last January to $16.1 trillion at the end of 2020. At 12.9% in November, the household saving rate was double the pre-pandemic level. If it fell back to normal levels, consumer spending would surge by about 6% and boost gross domestic product by four percentage points.
Not only that, but the velocity of money, or its turnover in relation to GDP, nosedived from 1.43 in the fourth quarter of 2019 to 1.15 in last year’s third quarter. This, too, suggests plenty of unused liquidity to fund spending. Banks have oceans of money to lend as shown by their reserves at the Federal Reserve, which soared from $1.66 trillion in January 2020 to $2.92 trillion in December.
Nevertheless, will Americans spend freely in coming months? Many were devastated by job and income losses when the pandemic hit last year, and Fed surveys reveal that many had almost no cash reserves for emergencies. Overall, 12% of households didn’t even have $400 set aside. So, to rebuild assets they saved two-thirds of the money they got from the federal government early last year, the Fed reports.
Households may well also save much of the recent and future federal checks as the trauma of last year persists. That would continue the reductions of debt in relation to after-tax income that commenced in early 2008 when debt was 132% of income. That ratio fell to 84% in the third quarter of 2020, but was still well above post-World War II norms of 60% that held until the consumer debt explosion that began in the early 1980s.
Furthermore, the likely economic softness to come in the first half of this year as the pandemic intensifies and pushes the economy back toward lockdown may encourage saving and discourage spending. And after the vaccines are distributed widely and people trust them enough to leave home, what will they spend on?
With the pandemic, spending has focused on goods. Stay-at-home consumers have spent heavily on exercise equipment and home furnishings as they moved from crowded urban apartments to more spacious single-family houses in suburban and rural areas. They bought cars to avoid public transportation. Vehicle sales in December, at a 16.3 million annual rate, were down only slightly from 16.7 million a year earlier. Consequently, much of future demand for goods has been satiated.
Services such as hotels, travel, restaurants and airlines have suffered tremendously due to the pandemic and may revive when it’s over. But services are consumed as produced so there’s no equivalent of goods inventory-rebuilding. Folks may go back to eating out twice a week, but not every night.
From a broader perspective, inflation results from demand exceeding supply, but since globalization commenced three decades ago, it’s been an excess supply world. Asian countries are big producers of exports they send to the West, but they’re weak consumers. China’s consumer spending is just 43% of GDP, compared with 68% for the U.S. So the resulting Asian saving glut generates price-depressing excess supply. Barring a tariff wall that seals off imports from Asia, any revival of U.S. consumer spending wouldn’t be big enough to eliminate global excess supply. And President Joe Biden is less zealous on the trade war with China than former President Donald Trump.
Finally, note that some investors aren’t anticipating surging inflation and interest rates. Technology-related and other growth stocks have low earnings yields, the inverse of price-to-earnings ratios, which are justified by low interest rates. The theory is that their present stock values equal the discounted value of future earnings, so the lower that discounting interest rate, the more their equities are worth today.
Earnings of $10 in 10 years hence is worth $9.05 today with a 1% discounting rate, but only $5.58 at 6%. So if investors expected a leap in inflation and interest rates, they’d probably be dumping growth stocks now.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
A. Gary Shilling is president of A. Gary Shilling & Co., a New Jersey consultancy, a Registered Investment Advisor and author of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.” Some portfolios he manages invest in currencies and commodities.
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