In times of crisis, people hoard cash

The ECB has investigated the question of why people are currently saving a lot more than they used to: Is it more caution or simply less opportunities to travel and shop?

The currency in circulation rose by almost 10 percent in July alone.

UThe money supply in Europe has recently grown by more than ten percent. That is an extraordinary amount and arouses concerns in some people that so much money could eventually lead to inflation. Reason enough for the European Central Bank (ECB) to deal in detail with the causes of the money supply growth in its economic report published on Thursday. Even if the connection between money supply and inflation, if ever there was, is no longer particularly strong today, in the opinion of many economists.

The sober figures are clear: The broad money supply M3 grew by 9.2 percent in June and by 10.2 percent in July. After all, that was the strongest increase since May 2008.

What’s behind it? In addition to cash and money in current accounts, this broad amount of money also includes various securities and investments that are relatively similar to money. The ECB now writes that a factor that can be observed in the crisis is a sharp increase in sight deposits on current accounts, but also in cash in circulation. The increase in the more narrowly defined money supply M1, that is the cash and the money from non-banks in current accounts, was the “driver” for the money supply growth as a whole.

More money in checking accounts

“The increase in money supply growth was also due to the extensive support measures that were taken by monetary and financial policy as well as the regulatory and supervisory authorities to provide the economy with sufficient liquidity to cope with the economic consequences of the Corona crisis,” write the economists of the ECB. In other words: It was the states that pumped money into the system and the central banks that provided liquidity that were partly responsible for the increase in the money supply.

When it comes to checking accounts, it is even more companies than private individuals who have kept more money than usual ready during the crisis. “The annual growth rate of overnight deposits rose from 13.1 percent in June to 14.1 percent in July, making the largest contribution to the growth of the money supply,” writes the ECB. “The increase was primarily due to corporate deposit levels.”

But cash in circulation also increased significantly during the crisis, by 9.8 percent in July. “This is due to a tendency to hoard cash against the background of considerable uncertainty,” write the ECB economists. The other short-term deposits and marketable financial instruments would have made only a small but increasing contribution to the growth of the money supply, despite the low interest rate level.

On the credit side, it was primarily domestic corporate loans that were a main driver of money supply growth. But also the purchase of government bonds (“net acquisition of government bonds”) by the central banks of the Eurosystem contributed more to the growth of the money supply in July than in the months before. Behind this were the bond purchase programs PEPP and APP.

Less spending on clothing

The central bank also deals intensively with the high savings rates of citizens during the crisis. It was only on Wednesday that DZ Bank announced that it was expecting a savings rate for Germany of 16 percent for the whole year, after 10.9 percent in the previous year. So the Germans are now even more economical than usual.

In the second quarter, the savings rate in Germany was an impressive 20.1 percent. If you compare consumer spending in the first half of the year with the same period in the previous year, it is noticeable that foreign consumption has declined by 14.6 percent and domestic consumption by 5.6 percent. “The main reason for the declining foreign consumption is the failed vacation abroad,” said Michael Stappel, economist at DZ Bank. Domestically, private consumer spending in hotels and restaurants in particular fell by 35 percent. Germans spent 17 percent less on clothing and shoes. Spending on transport and media fell by 24 percent, while spending on leisure, entertainment and culture fell by 13 percent.

The ECB has now dealt with the question of whether, for the whole of Europe, the increased savings rate has more to do with the fact that people withhold their money because they are afraid of losing their job, for example. Or simply because the Corona rules don’t make it easy to spend the money. For example, because the government temporarily made foreign vacations impossible or difficult.

After all sorts of analyzes and model calculations, the central bank now comes to the conclusion: “Involuntary saving seems to be the most important factor for the recent increase in private household savings.” It was just in the second quarter of this year, i.e. in April, May and June , the rise in expected unemployment also contributed to the rise of a precautionary fund among private households. “But that cannot largely explain the rise in the savings rate.”

This interpretation contains optimism: If people have only recently spent less money because all the Corona rules have made it difficult for them to spend money, then they can make up for it if the regulations are relaxed. If general pessimism had been the main reason for the new frugality, the consequences would probably have been longer.