H O W A R D S B E N D

One might say, “We have a liquidity problem”. A recent government report shows in the USA there is between $1.5 and $2 trillion more liquidity in personal accounts than there was at the start of the pandemic in early 2020.

There are several reasons for this build-up of liquidity over the past two years. First, there was the lockdown in the early phases of the pandemic and most people stayed at home and continued to work drawing a salary with no way to significantly spend this earned money. Even as restrictions were loosened, there were still not the opportunities to spend money shopping or on travel and or on other social activities. In addition, in March 2020, the federal government passed the CARES Act which provided $600 billion to small business to keep them afloat and to help them maintain there current payroll. These funds eventually made it to individuals with the same restriction on spending. CARES, also the Federal Pandemic Unemployment Compensation program (FPUC), provided an additional $600 per week to individuals who were collecting regular state funded unemployment insurance. All thee factors pumped up personal savings. And finally, the Federal Reserve pumped several trillion dollars into the economy through Quantitative Easing by which the Fed prints money to go out into the market to buy bonds from big institutions for cash pumping this additional money into the economy, some eventually makes into personal bank accounts.

We are now at the point where the pandemic is winding down and individuals are ready to go out and spend to and make up for lost time. However, the economy is plagued with shortages of all kinds of items as factories let their inventory rundown during the pandemic and are now finding it difficult to ramp up as they are having trouble getting parts and materials needed for their manufacturing process. These factories are having trouble finding employees to work in their plants. Transportation is also plagued with all kinds of labor shortages so items are not getting to and from manufacturing locations. This is the supply-side issues we hear are plaguing the economy.

So, we are at a point of heightened demand with supply shortages. As we all learned in school when demand exceeds supply prices will rise. It is now time to take money out of the economy to ease some of this excess demand without hurting the economy. The traditional rate hikes instituted by the Federal Reserve make it more expensive for businesses to borrow driving up their cost and eventually raising prices to compensate. This hike in interest rates is intended tp slow the economy. Higher rates slow the housing markets as mortgage rates rise. Housing growth is a key part of our economic growth. Thus, Federal Reserve rate hikes ease inflation by slowing down the growth of the economy.

I am suggesting a “Quantitative Tightening”. In this scenario, the government offers personal saving bonds at much higher rates than are now available in the market. As a starting point, I might suggest 3% on three year bonds, 5% on five year bonds and something like 7% on a ten year bond and possibly 12% on twenty year bonds. These high personal saving rates will encourage people with large amount of cash in the personal accounts to purchase these bonds. The personal saving rates offered today are so low that people do not commit to long-term saving and instead go out into the marketplace to spend this growing cash account. These high rates hopefully encourage people to save for the future and remove a large portion of the $1.5 to $2 trillion in excess liquidity out of personal savings, lowering demand for goods and thus easing inflationary pressure while having people still fill optimistic about their personal wealth knowing that they are earning a high rate of return on their savings. This should allow for the economy to continue to grow without the inflationary pressures.