What you see is not always what you get regarding money supply, saving, and hoarding.
In response to the Covid-19 pandemic, monetary and fiscal policies have protected nominal earnings for consumers and companies. Simultaneously, lockdowns and a loss of trust have kept consumers and companies from spending as much money as they used to. As a result, as shown in Figure 1, money balances held by private actors, primarily families, grew by EUR 715 billion in the EMU over the four quarters to Q1 2021. In the United States, they have climbed by EUR 1,784 billion in the four quarters leading up to Q2 2021.
Many analysts believe that such tremendous growth in privately held money balances suggests excessive saving. The reasoning is that when individuals tap into their savings to rectify the current surplus, money balances will fall, releasing pent-up demand and resulting in a robust rebound.
In truth, one may (and should) strengthen the excess saving argument by correctly differentiating the two components of what laypeople and some specialists informally refer to as saving, namely:
Saving proper, or expenditures other than consumption expenditures, and (marginal) hoarding, or money not spent at all because it has been added to previous precautionary money balances.
If one defines saving as the portion of income not spent on consumption, one may be misled to conclude that hoarding is a form of saving, equating money spent but not on consumption with money not spent at all. This analysis, which focuses on the hoarding of precautionary balances, contends that the growth in outstanding money balances that motivates the excess saving argument routinely underestimates or overestimates the firepower set away by private agents.
In reality, the excess saving argument understated the amount of money removed from circulation and saved away by consumers in reaction to the Covid-19 shock by roughly 20%. Saving hasn't indeed grown, but hoarding has, and considerably more than the cumulative growth in aggregate money balances since Q1 2020 would imply. The excess saving argument underestimates the issue of releasing the buying power that individuals have saved for rainy days is relevant to the growth and inflation forecasts. Unlocking stored money holdings is not as simple as those who base their inflation forecasts only on the money supply, risking missing the need for money.
Economists have many viable reasons for the country's long-term declining trajectory. Because long-term interest rates are low, the opportunity cost of keeping money in a savings account is likewise minimal. More broadly, with the prices of all types of financial assets so high, consumers may prefer to hold cash rather than riskier investments. A growing concentration of income and wealth in a few hands may enhance the velocity of money in asset markets, but not necessarily in commodities and services markets.
The relationship between inflation expectations and money velocity is a classic chicken and egg dilemma with potential positive feedback loops. Long-term inflation expectations, like short-term inflation expectations, are often backwards-looking. Furthermore, despite the recent rise in inflation, they remain modest and somewhat inelastic. With a growing sense of economic insecurity, low long-term inflation predictions may cause people to cling to their cash reserves.
A comprehensive study of the long-term reduction of money velocity is outside the scope of this inquiry, which focuses on the cyclical oscillations of money velocity around its long-term trend.
In the near term, money velocity rises when people have more money than they want and try to get rid of surplus liquidity.
A policy targeted at raising the velocity of money, which is currently regarded rare, should thus ensure that the supply of money exceeds its demand; this might need continual coordination of monetary and fiscal policy.
The recent disparities in the money supply and demand for money are too minor to cause significant variations in the velocity of money and, by extension, nominal growth.