Do you remember all of the toilet paper people hoarded at the beginning of the pandemic? It turned out they’d been hoarding cash and other easy money too, for the same reason: survival instincts.
Check out this graph that shows how Americans have responded financially to the Covid-19 pandemic. They took money from time deposits like certificates of deposit and put more money in accounts that gave them quicker access. The numbers are derived from the Statistics on the report on depository institutions Federal Deposit Insurance Corp.
Cash is king when the “fear of money” is high
Dollars in US accounts at the end of the first quarter of each year
Source: Federal Deposit Insurance Corp. * Includes checking accounts, money market deposits, and other savings accounts
The chart is inspired by Dan Geller, founder of San Francisco-based Analyticom LLC, who applies insights from behavioral economics to how people make financial decisions. Geller uses the FDIC data to compute a money anxiety index, which he believes has skyrocketed during the pandemic.
“This is hoarding. Money for mattresses. This is our defense and survival mechanism that tells us that we need to hoard food and wood and stay in the cave, ”Geller said in an interview.
To measure liquid deposits, Geller combines sight deposits with two other types of deposits that the FDIC categorizes as non-transactional accounts, money market deposits and “other savings”. I grouped the categories in the same way to create this diagram. The line for time deposits consists mainly of certificates of deposit that pay more interest but include an early repayment penalty.
An obvious question is why there were no more signs of fear of money in 2009. As the graph shows, time deposits actually rose from Q1 2008 to Q1 2009. Geller’s email reply: “The financial crisis was a gradual recession due to the main cause of the crisis – subprime mortgages.” Subprime mortgages emerged in the years following the 2007-09 recession, he says. The pandemic downturn was shorter and sharper.
Another question is whether the FDIC data captures the behavior of individuals, as much of the deposits are controlled by businesses rather than households. For Geller this is a distinction without a difference. “This is the biggest misunderstanding in the world. In your opinion, who makes the decisions in a partnership or corporation? People. Ultimately, we are all human and human behavior is universal. “