Not Strong, No Way

It should be evident by now that the “strong” economy of the last several years was nothing of the kind. To the contrary, the Keynesian GDP accounts were actually inflated by deferred spending run-offs that flowed from the utterly abnormal build-up of household cash during Washington’s pandemic lockdowns and stimmy extravaganza.

The story is evident in the purple line below, where the ratio of household cash balances to GDP stood at 60% back in 1985 and after some vicissitudes in the interim 35 years was still at 61% or $13.36 trillion on the eve of the pandemic in Q4 2019. Then Washington precipitously shut down the normal spending venues in the broad services sector of the US economy, thereby forcing households to save, while simultaneously injecting household bank accounts with a greater flood of free government cash than had been remotely imagined ever before, even in the biggest spending precincts inside the Washington beltway. At the peak in Q2 2020, the ratio of household cash to GDP hit 77.4%.

As it happened, several rounds of stimmies and lockdowns caused household cash balances to soar by nearly $5.0 trillion from the prepandemic level (Q4 2019) to $18.28 trillion by Q2 2022 or 71.5% of GDP. At that point, the implied excess compared to the normal 60% cash balance to GDP ratio was $2.93 trillion.

In the most recent quarters, however, household cash balances have slowly declined and have slipped to $18.03 trillion at Q4 2023, while nominal GDP has continued to expand. Consequently, the cash balance ratio has fallen to 64.5%. Still, the normal 60% ratio would have generated only $16.77 trillion of cash balances (currency, bank deposits and money market funds) in Q4 2023, meaning that the excess cash was still $1.26 trillion above normal at the most recent reporting date.

That figure in itself is the true tale. To wit, fully $1.68 trillion or 56% of the Q2 2022 excess cash balance has already been absorbed into the spending stream. Stated differently, during the six quarters between Q2 2022 and Q4 2023, the excess cash balance run-off amounted to $280 billion per quarter, while nominal GDP rose by $2.4 trillion or $400 billion per quarter. Accordingly, the excess cash run-off accounted for nearly 70% of the average GDP gain during the post-Lockdown and stimmy-driven recovery.

Then again, that’s about all she wrote. At the current run-off rate of excess household cash, the historic 60% to GDP ratio will be reached by the end of 2024. At that point, the US economy will be freighted-down with more than $100 trillion of combined public and private debt. And it will not be characterized as either strong or even resilient.