As recession fears grow, consumers dip into savings as banks pocket cash

As fears of an impending recession grow, financial institutions are holding record amounts of cash as ordinary Americans struggle to stay afloat.

The amount of cash available to big banks like JP Morgan & Chase, Bank of America, Citigroup and Goldman Sachs is on the rise, according to data from the first quarter of 2022. At the same time, personal savings rates hit their all time high. lowest in nearly 14 years, according to the US Bureau of Economic Analysis.

These trends are occurring as global economic conditions become increasingly volatile due to a variety of factors, including rising inflation, supply chain bottlenecks, rising interest rates, the lingering effects of the pandemic and the ongoing war in Ukraine.

A man shops at a grocery store on June 10, 2022 in New York City. The Labor Department said Monday that consumer prices rose 8.6% last month from a year earlier. Inflation has reached its highest level in four decades, driving up the cost of airfare, hotels, vehicles, gasoline and food.
Photo by Spencer Platt/Getty Images

“When you see things that have never happened before, you have to question your ability to predict,” said Jamie Dimon, chairman of America’s largest bank, JP Morgan & Chase, at the annual strategic decisions on June 4.

He told a large audience that having cash was the best way to protect against future inflation, and changed his previous prediction of economic “storm clouds” to “a hurricane” in a comment that instantly went viral.

But Dimon’s warning of impending economic peril is consistent with those of many other experts. According to a Financial Times poll, nearly 70% of leading economists now believe the US economy will tip into a recession within the next year.

As a result, major financial institutions are setting aside more cash to prepare for what they expect to be a particularly volatile period. BlackRock, the world’s largest fund manager, told the Wall Street Journal it was increasing cash positions by more than 50% in many accounts.

As markets continue to fall, major financial institutions are reducing their exposure to stocks and other risky investments in favor of cash. But while these measures help institutions avoid losses, consumers face more threats to their financial health.

May’s Consumer Price Index report pointed to rising core inflation, with the cost of food, energy and housing rising nearly 10%, 20% and 30%. %, respectively, since last year.

While the institutional cash savings rate hit a record high in the first quarter of this year, the consumer savings rate fell to 4.4% in April, a low not seen since September 2008, at the start of what became known as the Great Recession, according to the most recent data from the US Bureau of Economic Analysis.

Taking over much of the financial gains made during the pandemic, inflation is forcing more Americans to dip into their savings accounts to cover the costs of basic necessities like food, gas and shelter, according to a report. recent survey by NerdWallet.

And credit card balances, which were reduced after Americans received government stimulus funds, are rising again at a record 16% annual increase, according to Barron’s.

Economists predict that higher prices and debt, combined with lower savings rates, will soon result in reduced consumer spending – bad news for an economy in which recent growth has been demand-driven. record consumption.

Dan Schulman, chairman of PayPal, expressed concern about these emerging trends during a recent visit to the World Economic Forum in Switzerland.

Speaking to a panel of experts, he said the current combination of high spending and high inflation means Americans are burning through their savings at a rate that could cause them to run out of cash by the end of this calendar year.

“We’re already seeing a reduction in spending at lower income levels,” Schulman said, “and that’s now shifting to middle incomes.”

Concerns about the strength of US portfolios and purchasing power have reached the Oval Office.

While President Joe Biden began noting rising prices as a concern late last year, in May he officially declared “fighting inflation” to be his top economic priority. Since its announcement, the CPI for all items has increased by almost 1%.

Biden continues to encourage Americans to “keep the faith,” delivering that message during a visit to the Port of Los Angeles on Friday, just hours after new inflation numbers were released.

“I understand that inflation is a real challenge for American families,” he said, “and today’s inflation report confirms what Americans already know.”

But Biden insisted the country was up to the challenge.

“America can fight inflation from a position of strength like no other country in the world,” he added.

Despite Biden’s optimism, the economic outlook for the rest of this year remains bleak.

Economist Narayana Kocherlakota, former president of the Federal Reserve Bank of Minneapolis and Lionel W. McKenzie professor of economics at the University of Rochester, does not see economic conditions improving in the short term.

“Once you have inflation at this level, the only way you can bring it down, through policy tools, is to incur a cost of unemployment,” he said.

“Unemployment and inflation, I’m afraid, both have political costs,” Kocherlakota added, “so there’s no easy way out of that.”

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