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The extra deposits created will not evaporate


In the wake of the Covid-19 crisis, bank deposits, which represent the main component of broad money, have seen extremely rapid growth in both the eurozone and the USA. The extra money created will not evaporate suddenly once the health protection measures are over or nonconventional monetary policies come to an end.


TRANSCRIPT // The extra deposits created will not evaporate : September 2021

For over a year now, broad money and more specifically bank deposits from households or companies have recorded exceptional growth both in the Eurozone and in the United States.

In the past months, their pace of growth has slowed down but has remained historically high.

The ECB's strategy to identify the counterparts to the money supply allows to understand the reasons behind this momentous growth of deposits and also to discern the potential causes of their destruction.

It shows that this exceptional money creation can be explained, at the macroeconomic level, by the expansion of asset purchase programmes led by central banks and by national guarantee schemes to support companies. In other terms, the wait-and-see coerced behaviours of savers facing economic risks or health restrictions due to the pandemic

have triggered a rise in households' deposits and have contributed to an increase in savings rates. But it did not increase the overall mass deposits in the economy. At the very most, it slowed down the circulation of deposits and altered their allocation.

The growth of households' deposits has been very dynamic at the aggregate level but also very irregular due to income losses or job losses. And likewise, the fact that companies have cancelled some spendings or investments restrained the transfer of resources between companies.

The differentiated impact of the pandemic from one sector to another and the uneven use by companies of treasury support could have altered the allocation of deposits.

However, reduced spendings and deferred investments were not synonymous with money creation. Likewise, a recovery in spendings and investments is not synonymous with the destruction of deposits.

On the contrary, these spendings support economy activity, credit demand and therefore the creation of new deposits. Part of the money created over the past year will be progressively destructed as companies repay their guaranteed loans.

However, the asset purchase programmes led by central banks and a sustainable and positive growth rate of outstanding loans will continue to support growth of deposit rates.

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