Tessa: A new economic tool; A Temporary Equity Spend and Save Again system

De Koning, Kees (2020): Tessa: A new economic tool; A Temporary Equity Spend and Save Again system.

Abstract

The corona virus pandemic has caused and will cause severe hardship for nearly all countries in the world. Government expenditures have gone up dramatically in many countries and tax revenues will drop substantially. Unemployment levels will reach historical highs according to the International Labour Office. Worldwide some 1.6 billion workers will be severely affected . Governments have helped companies to furlough staff and pay such staff from government budgets. Central banks have expanded Quantitative Easing activities and lowered interest rates to practically zero or in case of the ECB to below zero. On April 29th this year, the Fed left its target range for its federal funds rate unchanged at 0-0.25 percent and reiterated it is committed to using its full range of tools to support the economy hit by the coronavirus crisis. U.S. policymakers said that the on-going public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.

Savings incorporated as equity in homes constitute a very substantial source of wealth in many countries. To give a few examples: in the U.S. the net worth embedded in homes was approximately U.S. $23 trillion as per February of 2020. The U.S. GDP for 2019 was $21.2 trillion. In 2018 in the U.K. the total household sector had a net worth in non-financial assets of £4.74 trillion. U.K.’s GDP was £2.11 trillion in the same year. In another example: in 2018, Italy had a home equity level of approximately €3.28 trillion with a GDP level of €1.757 trillion. Spain has a home ownership level of 76.2% far above Germany with 51.5% of households.

In many countries, the collective levels of home equity wealth -or in other words the savings locked into homes- are often a multiple of annual GDP levels. Why is it that these savings are not used at all to stimulate economies?

There are two reasons for it: The first one is linked to the banking sector. The latter can only turn an asset into a liability. The second reason is that part sales of a home are an untested territory in economic terms.

This paper will explain the economic option of a Temporary Equity Spend and Save Again (Tessa) system.

• Item Type: MPRA Paper
• Language: English
• Keywords: Quantitative Easing (QE); Quantitative Tightening (QT); home equity; Tessa; Federal Reserve, ECB; Bank of England; Bank of Japan; Italy; ILO; IMF
• Subjects: D - Microeconomics > D1 - Household Behavior and Family Economics; D - Microeconomics > D1 - Household Behavior and Family Economics > D11 - Consumer Economics: Theory; D - Microeconomics > D1 - Household Behavior and Family Economics > D14 - Household Saving; Personal Finance; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E51 - Money Supply ; Credit ; Money Multipliers; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies

References

Federal Reserve, Washington D.C.: Federal Reserve Balance sheet 2007-2020; https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm

Federal Reserve, Washington D.C. Statistical Release week ending April 29, 2020; Factors affecting Reserve Balances of Depository Institutions; https://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab9

Federal Reserve Bank of St. Louis, December 12, 2019; Mortgage Debt Outstanding by Type of Property; one to four family residences; https://fred.stlouisfed.org/series/MDOTP1T4FR

International Labour Office, Geneva; 29 April 2020, ILO Monitor Covid-19 and the world of work, Third Edition; https://www.ilo.org/wcmsp5/groups/public/---dgreports/---dcomm/documents/briefingnote/wcms_743146.pdf

International Monetary Fund; IMF; Washington, D.C. April 14, 2020; Tobias Adrian and Fabio Natalucci; Covid-19 Crisis poses Threat to Financial Stability https://blogs.imf.org/2020/04/14/covid-19-crisis-poses-threat-to-financial-stability

U.S. National Association of Home Builders; March 11, 2019; Litic Murali; Equity Rises for U.S. Home Owners; https://eyeonhousing.org/2019/03/strong-equity-cushion-formed-for-u-s-homeowners-by-2019/

U.S. Government Revenue 2019; https://www.usgovernmentrevenue.com/