The Other Side Of The Savings Coin 2

July 22, 2021

The Other Side Of The Savings Coin 2

Savings and expenditure aren't the only factors, income is too. It's a trinity, not a coin

The first group will be the ones with the highest degree of pent up demand, simply because they were never in a position of financial difficulty during the pandemic in the first place. For people in this category, pandemic lockdowns were a literal block on their ability to spend, at least with regards to dining in restaurants, going to bars, and living a social life outside of their homes. Naturally, when full reopening occurs, these folks will be out spending with a vengeance.

On the other hand, the second and third groups will not have such high levels of pent up demand. Why? Simply because, in most cases, they still cannot afford to spend much money.

For those in the second group, going back to work alleviates much of their uncertainty and would probably see a spike in initial spending as they celebrate receiving their paychecks and being able to go out again. This spike would represent this category of workers’ pent up demand; not a small amount, but not sustainably large either. Why the emphasis on sustainably?

Because for these folks, not having incomes during the lockdown months meant having to live on, and conserve their savings for an uncertain future. While going back to work is undoubtedly a good turn of events for them, they still need to rebuild their savings. This necessarily means less spending, and hence a lower degree of pent up demand when compared to people in the first group.

Finally, people in the third group will have the least pent up demand of the groups. Like those in the second group, they had to live off their savings and conserve cash. However, they have not returned to work, and are still stuck struggling to secure a stable income. As a result, these folks simply cannot spare the cash to spend on anything beyond what is necessary.

Again, It comes back to having stable employment and a secure income stream. This is the third point of the trinity, and is what determines how much pent up demand an individual or family can have. As can be seen from the examples given above, those with no, or the least secure incomes (people in the second and third group), simply are not in as good a financial position to dip into their savings and spend wildly.

Consequently, savings must be considered together with income (or lack thereof) when discussing the effects of pent up demand during economic recoveries. Not doing so paints the macroeconomic picture with too broad a brush, which can limit our ability to perceive real problems in the post pandemic economy.

What good is a couple of quarters of superlative GDP growth numbers due to pent up demand, if the structural employment problems in the country persist? We are only storing up problems for the future.