Fed hawkishness peaks as rising debt payments erode savings
The pandemic rise in excess savings was probably the most rapid increase in wealth ever seen. A combination of a collapse in demand and huge government transfers led to an estimated peak of
But after the feast comes the famine, and excess savings are being run down swiftly as inflation causes prices and interest rates to rise. These excess savings act as a buffer to a recession as they dampen the feedback loop of a decline in spending, leading to a fall in income, which means less spending, and so on.
The dissaving can be seen in the rapid decline in "excess disposable income," i.e. disposable income above its pre-pandemic trend. It is back to flat based on a 30-year trend line, signifying that excess savings are no longer being bolstered by excess income because people are spending more and pandemic-related transfer payments from the government have ceased.
Savings are being increasingly stressed by rising debt repayments. Consumer and mortgage debt interest rates are rising. Debt-service ratios (debt repayments as a percentage of disposable income) remain relatively low, but are also increasing, and could do so fairly rapidly as debt is re-fixed at higher rates.
In nominal terms, households have to repay an estimated
The recession buffer is being wiped out, leaving the
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