Extra liquid wealth

A new theory of rising consumer delinquencies

• Pandemic “extra liquid wealth” is the new “excess savings”

• What explains the recent rise of delinquencies?

• Money market funds keeping liquid wealth liquid, but less liquid than we might have been

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What explains the recent rise in delinquencies?

Random Walk has been duly chastened by metrics like “excess savings.”

It seemed like a neat way of calculating the stimmy surplus, and (more importantly) timing its eventual fritter and waste. When “excess savings” was to finally go negative, then consumers would be dependent solely on incomes to sustain their spending.

It turns out that it was a pretty squishy metric that was highly sensitive to minor changes in methodology, and ultimately, didn’t say much about what consumers would do or not do with any reliability.

But, as the old saying goes, “fool me once, fool me over and over again,” and so I now present a new estimation of stimmy surplus: “extra liquid wealth.”

The measure comes from a recent brief from the SF Fed that tries (among other things) to take a closer look at household financial health, and what, if anything, is driving the recent increase in credit card delinquencies.

When extra cash is depleted, delinquencies rise

According the SF Fed, when “extra liquid wealth” goes negative, credit card delinquency rates begin to rise, shortly thereafter:

Excess liquid wealth is depleted, and delinquency begins to rise

SF Fed

For both higher- and lower-income households, credit delinquencies begin to rise at or around the point that “extra liquid wealth” is depleted.

Unsurprisingly, lower-income households had less extra liquid wealth, and therefore depleted it sooner, and became delinquent sooner, as well.

Sounds reasonable enough.

Extra liquid wealth makes a partial comeback

The other interesting thing you might notice is that “extra wealth” for higher income households actually started growing again early in 2023.

Why would liquid wealth, primarily in the “buildup of cash and bank deposits” start growing again for higher income households?