To paraphrase the Captain in Cool Hand Luke, what we've got here is failure to calculate. That is, the US economy has been radically tortured and twisted by the pandemic era lockdowns and stimmies. So normal economic activity that was disrupted and deferred during the worst lockdown quarters of 2020-2021 has now re-emerged in 2022-2024.
At the same time, the $10 trillion worth of fiscal and monetary stimmies which were force-fed into the US economy during 2020-2021 could not be immediately absorbed by the reduced level of main street activity back then. So they were essentially stock-piled in a huge, unprecedented build-up of household cash balances.
The purple line in the chart below shows total household cash balances (currency, bank deposits and money market funds) relative to GDP. During the decade or so before March 2020 that ratio stood at about +/-59%. But it then soared to 77.4% during Q2 2020 when nominal GDP contracted by 34% owing to the Lockdowns, even as Washington pumped $2.2 trillion of cash into the economy via the CARES act.
In dollar terms, household cash balances (dashed black line) went from a normal $13.4 trillion in Q4 2019 to a peak of $18.3 trillion in Q1 2022, by which time the entire $6.5 trillion of fiscal stimmies had been largely distributed to the main street economy. Yet had the historic ratio of 59% been in place in Q1 2022, the level of household cash balances would have been about $14.8 trillion, meaning, in turn, that households were sitting on about $3.5 trillion of extra-normal cash balances.
This $3.5 trillion cash hoard has functioned as a counterweight to the Fed's monetary braking action since March 2022. What has happened is that the earning power of those cash balances has soared as overnight rates went from 25 basis points to 525 basis points, even as households have been slightly reducing their extraordinary cash balances.
Nevertheless, by Q4 2023 household cash balances stood at $18.0 trillion, which was still far above normal levels. Again, at the 59% historic ratio the household cash balance in Q4 2023 would have been about $16.5 trillion, meaning that the size of the cash hoard was still $1.5 trillion larger than normal.
In effect, households have kept on keeping on when it comes to consumption spending because these huge, extraordinary cash cushions have bolstered confidence, even as the Fed has attempted to cool-down economic activity. This huge cash cushion essentially represents a form of delayed "stimulus", which was sequestered during the disruption of the pandemic era and is now replacing what would have otherwise been an increase in the household savings rate and corresponding reduction in current consumption spending.
