Is The Personal Savings Rate Being Distorted By Retail Trading?
- Strategeriest
- May 3, 2021
- 2 min read
Good afternoon,
Economists seem to widely agree that there is pent up demand waiting to be released on the economy as COVID wanes. One of they key indicators referenced in support of this assumption is the Fed’s measure of the Personal Savings Rate.
Assuming savers are not preparing for this administration’s pending tax hikes, at a quick glance, this savings rate increase does seemingly indicate pent up demand in the economy. However, I am not completely sold on this hypothesis. Considering the price levels of the market, crypto currency prices, and the recent explosion in margin account leverage, I think this figure is more nuanced than most economists portray it to be.
As the St. Louis Fed’s site elegantly explains, the Personal Savings Rate, “may generally be viewed as the portion of personal income that is used either to provide funds to capital markets or to invest in real assets such as residences.(https://www.bea.gov/national/pdf/all-chapters.pdf)”https://fred.stlouisfed.org/series/PSAVERT
It is calculated by subtracting a representative sample of the US population’s personal outlays and personal taxes from their personal income.
My hunch is that the increased savings rate being evidenced by this work is being distorted by a reduction in personal outlays in the real economy due to investment budgeting decisions and an increase in personal income from retail trading.
The formation of my hunch is derived not only from the asset prices of various markets, but also from Three other factors.
1. The increased margin accounts we are witnessing drive up various markets.
Below is evidence of the increased margin accounts. With the growth is asset prices, one would expect this would correlate with an increase in capital at risk in the market as well as an increase in trading income from market participants.
2. There has been a disconnect from correlations in the Velocity of M1 Money Stock from this personal savings rate. The smooth decline in the M1 Money Stock does not seem to be affected by the recent volatility in the Personal Savings Rate.
3. An analysis of the M1 Money Velocity Equation (Which does not directly consider the savings rate, making it a valuable check against the savings rate figures).
One would expect Money Velocity to slow as the Savings Rate Increases, all else being constant.
The Traditional M1 Money Velocity Equation is Nominal GDP/M1 Money Supply. Even considering the massive explosion in the M1 Money Supply, the results do not seem to be affected by the recent volatility In the Personal Savings Rates. There is a slight blip of correlation if you remove the government spending from the GDP equation however.
Let us hope I am wrong, the mainstream economists are correct, and that the increased Personal Savings Rate we are witnessing will help fuel the economy to new heights as the GDP Less Government Spending Rebounds.
Warmest Regards,
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