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Savers stashed $127-billion in 2020 – it may just rescue the economy

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Lots of attention has been paid to the financial risk-takers in the pandemic – the people bidding to buy houses, buying expensive stocks and dipping into speculative things like gold and bitcoin.

But the ones who may end up doing the most good for our economy are the people who added a stunning $127-billion to savings and chequing accounts and term deposits in the first half of the year.

“The amount of liquidity building up in the system is unreal,” said Carlos Cardone, senior managing director at Investor Economics, which is part of ISS Market Intelligence. “If redeployed into investments or expenditures, this might well be the engine for the recovery of a good part of the economy.”

Investor Economics, which provided the $127-billion figure, says the average amount of money flowing into savings, chequing and GIC accounts averaged $32-billion for the first half of 2017, 2018 and 2019. Those flows were considered to be fairly high until the pandemic scared people into maximizing their savings. “This year’s number is beyond anything we have seen,” Mr. Cardone said.

Another take on this trend comes from Statistics Canada, which tracks our national savings rate and has its eye on the pile of cash accumulated this year. The percentage of after-tax income going into savings has jumped from just 2 per cent to 3 per cent prepandemic to 28.2 per cent from April through June.

Money held in deposits of any sort today is painfully unproductive, especially in comparison with stocks in recent months. Interest rates fell like a rock when the pandemic began and banks, trust companies and credit unions have continually been cranking interest rates on savings lower.

Big banks are pretty much out of the business of paying interest on deposits now. One bank’s online savings account offered 0.05 per cent early this week, while another’s paid zero on balances under $10,000 and 0.1 per cent on higher amounts. Meantime, high rate savings accounts at alternative banks and credit unions paid no more than 1.5 to 1.8 per cent. Get those rates while you can.

Mr. Cardone noted that a significant amount of the money that was parked safely in 2020 sits in chequing accounts, where interest is either paid in trace amounts or not at all.

After taxes and inflation, safely parked money may earn you next to nothing. You could even end up losing money if the cost of living increases. On that basis, it’s tempting to laugh at anyone keeping money safe while so much money has been made in stocks, in gold, in housing, in bitcoin, and more.

But there’s potential for a lot of good to come out of that safely parked money if it’s used smartly and not left to sit for years. It’s much harder to reach your financial goals if you simply accumulate money in savings, earning nearly no interest.

Debt reduction is an excellent use of money parked in a savings account. Interest rates on debt right now are very low, whereas rates of return from stocks and bonds have been strong in recent months. But you’re guaranteed a benefit when you pay down debt, while financial markets are unpredictable. The less debt you carry, the better you’ll be able to weather a second wave of the pandemic that causes a loss of jobs or income.

For the good of the economy, some of that $127-billion should be spent as well. The latest numbers on retail sales suggest we’re buying more stuff than we were before the pandemic, but spending on services remains weak. The economy could definitely use more help from consumers.

Of course, some of the $127-billion should be invested. Forget about whether the stock market is too hot, too cold or just right. Start shovelling money into a diversified portfolio in regular increments – every payday or every month – and stick with that schedule until, say, retirement.

We all benefit if that $127-billion blob of savings is spent wisely. The economy would grow and gain strength from lower household debt levels. Jobs and wages would stabilize and the stock market might find a second leg of growth.

Thank a saver today. They’re doing heroic work that could be vital in the months ahead.

Source: – The Globe and Mail

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Economic Growth Looks Good For Now, But Families Need More – Forbes

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The economy is in a good spot right now, but Congress needs to act quickly to strengthen the recovery further. Millions of people are still looking for a job and face financial hardship such as evictions without continued strong economic growth. At the same time, the pandemic has changed face again with the Delta variant ripping through the country, creating a lot uncertainty over the future path of the economy. Amid these challenges, Congress can enact additional measures to ensure a continued strong recovery that benefits all households.

The economy grew at a strong pace in the first half of 2021. Gross domestic product (GDP) growth amounted to an annual rate of 6.5% between March and June 2021. This was slightly faster than the already fast annual growth rate of 6.3% in the first three months of 2021. GDP in the second quarter of 2021 had finally caught up to and exceeded, by about one percent, the inflation-adjusted GDP level recorded for the last three months of 2019 before the pandemic started. The accelerated recovery in the first half of 2021 helped to regain the losses of economic activity associated with the pandemic faster than would have otherwise been the case.

Faster economic growth in the first half of 2021 came about in large part because of President Biden’s American Rescue Plan enacted in March 2021. Gross domestic product has exceeded what analysts forecast for 2021 prior to passage of the American Rescue Plan, for instance. In particular, Harvard University’s Jason Furman, former chair of President Obama’s Council of Economic Advisors, and Wilson Powell III report that the U.S. economy grew as much in the first half of the year as analysts had predicted for the entire year 2021. The massive relief bill enacted in March did exactly what it was supposed to do by putting the economy on a path to a quicker recovery, while helping struggling families deal with the ongoing fallout from the pandemic.

The economy still has room to grow in the short term. Supply chain bottlenecks in particular held back economic activity in the spring of 2021. Businesses, for example, depleted inventories as they often found it difficult procure intermediate and final products to sell. The depletion of inventories reduced economic growth by 1.1 percentage points. GDP growth would have been 7.6% instead of the reported 6.5% between March and June 2021 if businesses had not reduced their inventories. Similarly, new housing activities fell amid lumber and other material shortages, reducing GDP growth by another 0.5 percentage points. As supply bottlenecks gradually ease, the economy will likely overcome some of these headwinds and boost growth.

This short-term momentum will not be enough to address the looming challenges. Congress still needs to invest more in a prolonged strong economic recovery that benefits all American families, even in the context of these recent good news. First, millions of Americans are still out of work. Second, the economy would have likely grown after 2019 absent the pandemic and thus need to go some ways to catch up to where it would have been. The Congressional Budget Office predicted in January 2020 that the economy would be 1.8% larger in the second quarter of 2021 than it actually was. Third, modest productivity growth and massive inequality marked the economic performance prior to the pandemic. Households struggled with paying their bills, even amid low unemployment before the pandemic hit. Building on the current strong performance to ensure a continued robust recovery also means correcting these imbalances that persisted after the Great Recession from 2007 to 2009. Congress’s work in building a strong, inclusive recovery is not yet done.

Passing the Bipartisan Infrastructure Framework (BIF) currently making its way through Congress and the $3.5 trillion budget resolution are key to achieving robust, equitable growth. Those measures will provide public investments in a wide range of infrastructure that has been neglected for too long and that the private sector will not fully finance. Roads, bridges, and access to affordable internet are just some of the investments that will translate into faster innovation, lower costs and higher productivity and economic growth. Congress will also tackle climate change and thus reduce costs of extreme weather events for people and businesses. Lower costs will again translate into faster economic growth over time. It is good to know that the administration and many members of Congress understand that their work is not done with two quarters of remarkably strong growth. American families have waited too long for a return to strong, inclusive long-term economic growth.

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Brazil Set for Biggest Rate Hike Since 2003 as Economy Reopens – Bloomberg

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A new front is opening up in Brazil’s war against inflation amid surging costs for services from airline fares to appliance repairs, sparking speculation that one of the world’s most aggressive central banks may this week deliver its biggest interest rate hike in almost two decades.

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Australia Sticks With Taper Plan Even as Virus Dents Economy – Bloomberg

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The Reserve Bank of Australia said it will stick with its planned tapering of bond purchases even as Sydney’s protracted lockdown is set to shrink the economy this quarter.

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