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Fed: US consumers have decided to 'hoard money'

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massadvj:
Fed: US consumers have decided to 'hoard money'
Jeff Cox   | @JeffCoxCNBCcom

One of the great mysteries of the post-financial crisis world is why the U.S. has lacked inflation despite all the money being pumped into the economy.

The St. Louis Federal Reserve thinks it has the answer: A paper the central bank branch published this week blames the low level of money movement in large part on consumers and their "willingness to hoard money." The paper also cites the Fed's own policies as a reason for consumers' unwillingness to spend.
Though American consumers might dispute the notion that inflation has been low, the indicators the Fed follows show it to be running well below the target rate of 2 percent that would have to come before interest rates would get pushed higher.

That has happened despite nearly six years of a zero interest rate policy and as the Fed has pushed its balance sheet to nearly $4.5 trillion.

Much of that liquidity, however, has sat fallow. Banks have put away close to $2.8 trillion in reserves, and households are sitting on $2.15 trillion in savings—about a 50 percent increase over the past five years.

"So why did the monetary base increase not cause a proportionate increase in either the general price level or (gross domestic product)?" economist Yi Wen and associate Maria A. Arias asked in the St. Louis Fed paper. "The answer lies in the private sector's dramatic increase in their willingness to hoard money instead of spend it. Such an unprecedented increase in money demand has slowed down the velocity of money."

Monetary velocity—or the force to which money is put to work in the economy—is widely considered a key metric in measuring inflation.

Under normal circumstances, according to the Fed analysis, when the money supply increases at a faster rate than economic output, which has been the case since the Fed has instituted its aggressive easing practices, prices should keep pace. Factoring in the growth in the money supply against output, inflation should have grown at a whopping 33 percent annually, when in fact it has been rising less than 2 percent.

The reason that inflation hasn't kept up with gains in the money supply simply has been that people are sitting on cash rather than spending it, which has kept money velocity at historically low levels. Yi and Arias explained:

During the first and second quarters of 2014, the velocity of the monetary base was at 4.4, its slowest pace on record. This means that every dollar in the monetary base was spent only 4.4 times in the economy during the past year, down from 17.2 just prior to the recession. This implies that the unprecedented monetary base increase driven by the Fed's large money injections through its large-scale asset purchase programs has failed to cause at least a one-for-one proportional increase in nominal GDP. Thus, it is precisely the sharp decline in velocity that has offset the sharp increase in money supply, leading to the almost no change in nominal GDP.
The hoarding of money, then, is attributed to two factors:

A (gloomy) economy after the financial crisis.

The dramatic decrease in interest rates that has forced investors to readjust their portfolios toward liquid money and away from interest-bearing assets such as government bonds

The Fed pair go on to make a fairly stunning indictment of sorts about Fed policy:

In this regard, the unconventional monetary policy has reinforced the recession by stimulating the private sector's money demand through pursuing an excessively low interest rate policy (i.e., the zero-interest rate policy)

massadvj:
People are hoarding money for one reason: lack of confidence in the future due to Barack Hussein OPapaDoc's transformation of America.  They are certainly not hoarding money when it comes to buying gold and guns.

Millee:
I wish I had money to hoard, but everything's gone up except my paycheck.   **nononono*

Free Vulcan:
With prices rising, people want savings to compensate. Less frivolous spending on intangibles, more on real goods. Let's add paying off debt to that as well. Making sure basics are taken care of and a reserve for uncertain times.

Bottom line though, hoarding cash is no answer. We are in a real goods economy. Very blunt with people when the conversation comes up on the economy. I repeat 4 simple words:

Learn
To
Live
Amish

Seeds, tools, equipment, and all the other goodies for self-sufficiency are far better than cash.

sinkspur:
Meanwhile, the US stock market has TRIPLED in value since 2008 and here are all these people stuffing money in their mattresses.

Dopes.

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