Using Velocity to Sketch The Post Covid Fiscal Impulse

Though the number of transactions decreased post 2008, the steadiness and discrete manner that V changed and then increased can be used to understand what the impact of monetary impulse and fiscal impulse has been since the start of Covid (this report uses April 1 2020 as the start of Covid) to date.

The last V value just before Covid has the difference to post Covid V values times the then NGDP level. It is assumed that this will be the size of the fiscal impulse.

Deriving Post Covid Excess Savings

Excess Savings (ES), which are cumulative savings over time in excess of the normal 11% of Disposable Personal Income (DPI), is derived. It is found that up to 10% of NGDP of ES was provided by the fiscal impulse, peaking Q II 2022. Since QII 2022, the amount of ES has dropped to now approximately 3% of NGDP. The decline from 10% to 3% over the 1.3 years gives an idea of the rate in time of the decline which provides the estimate that there remains approximately 1 year left to ES. It shoudl be considered that DPI is still strong and the savings continue, returning to the norm of 11% of DPI from lows of about 4% of DPI which is slowing the use of the ES.

What is perhaps more useful is comparing the size of the fiscal impulse to ES and it is found to be steady with a high correlation.

Therefore it is assumed that at least 1 year remains of the fiscal impulse from Covid. That may mean that the current inflation, which is related to the fiscal impulse will continue to another year or so.

Any monetary impulse would show immediately in M2 as it goes into the bank system and the channels available to the Federal Reserve to ease the system. There is no such sign of a monetary impulse either a ease or a tightening after January 2022.