Fed: US consumers have decided to 'hoard money' … 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." – CNBC
Dominant Social Theme: This money hoarding has got to stop for the economy to get better.
Free-Market Analysis: Sometimes Federal Reserve white papers attract attention and this one does because of the term "hoarding money." This is a startling phrase and – who knows – perhaps it marks the beginning of a new meme.
Certainly the word "hoarding" is a popular one with government officials. When governments are uncomfortable with the actions of citizens for whatever reason, the term "hoarding" is often applied to stigmatize certain behaviors and encourage others.
In this case, the authors of this paper don't seem to have in mind stigmatization so much as explaining the phenomenon they are analyzing and suggesting ways monetary policy can alleviate the behavior.
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."
MoreFed minutes: Some want 'relatively prompt' rate hike 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.
… 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).
This is surely a bold statement but also a frustrating one for it produces yet another rationale for why money is not circulating and people are not consuming. The whole attitude here is that people are kind of like lab rats and Fed economists through various stimuli are attempting to provoke appropriate reactions. When the reactions are not forthcoming, papers are written to analyze where things went wrong and how they can be made right.
The trouble is that they can never be made right because the paradigm itself is wrong. The US, for instance, has at least a $14 trillion economy (does anyone really know?). The idea that a few "top brains" can through monetary and fiscal measures steer this gigantic environment toward a nirvana of full employment and wealth-production is chimeric.
Central banking is basically monopoly price fixing and even though this white paper makes some good points about how the Fed's own actions are contributing to the continued downturn, the underlying premise is that some sort of Fed is necessary.
It's really not. Western economies generally would be much better off without regulatory, fiscal and monetary prodding that are supposed to move the economy in certain directions but almost never do.
Economics from this standpoint is anything but a science – as we pointed out the other day. But the language used by Fed officers is the language of science and it sounds impressive.
The paper, for instance, speaks of "monetary velocity" and uses its lack as a sign that the economy is not recovering and people are not injecting funds as they might be normally. But monetary velocity – if we grant its existence to begin with – is a symptom not a cause. The real cause from a free-market standpoint has to do with people and businesses simply not trusting what's going on around them in terms of a "recovery."
The US Fed in particular has counteracted this sentiment with a program of compulsive money printing that has likely only aggravated the problem by further distorting what was already unbalanced. As a result, money has circulated at the highest levels of the economy, enriching the most wealthy and contributing to the "income disparities" that it is fashionable to bemoan these days.
This super money finds its way from commercial banks – the distributors of Fed printing – to multinational corporations and into securities marts. Asset bubbles are the inevitable result and we are already seeing these asset bubbles beginning to form. The largest asset bubble of all is the Wall Street Party and no matter the length of time it runs, we can say with some certainty that what is driving it is not "fundamental value" but monetary policy.
The authors of this white paper make some good points about Fed actions and their contradictory effects. Raising rates, they argue, will stimulate money circulation as other economic elements regain value and money itself becomes less precious once a zero-rate environment is removed. The end of the article on this paper provides us with different perspectives, however. The St. Louis group is labeled, peculiarly, as "hard money" and their analyses are rebutted as follows:
The findings, of course, beg the question of what happens once the Fed takes its foot off the throat of bond yields, people start spending again, and the velocity of money, at least theoretically speaking, runs wild. Economist Michael Pento, a frequent and harsh Fed critic, believes the St. Louis group has some of its assumptions wrong, particularly its understanding of why people aren't spending money. He sees it more as a function of high levels of debt that are constraining spending.
While Pento believes rates should rise, he thinks the initial reaction is going to be painful for the economy and unlikely to unleash a torrent of new spending. "They're hard-money guys and I like them," Pento said of the St. Louis Fed. "I think they're trying to make an argument for interest rates to go up. But if they think rising rates are going to be good for the economy in the short term, they're mistaken."
Pento's remarks, presented in the context of the paper itself, show us once again that such economic analyses are always subject to various interpretations. The trouble is that inevitably they are not theoretical but have real-life ramifications because of the laws in place that actualize what would otherwise be harmless musings.
It is impossible for planners – even the most acute – to fully figure how economies are operating at any given point, much less prescribe actions that will affect them in positive ways. And while this white paper makes some very good points about how central bank actions can have a negative impact on real-world behavior, in doing so, it tends to reinforce the idea that certain Fed moves are "better" than other ones.
In fact, this is not the case. It is by now impossible to figure out what a "normal" economy is or how it should operate.
There are far too many command-and-control facilities in place that retard the creation of logical models. The best white paper that fed officials could write would probably be one advocating that central banks cease manipulating interest rates and money supplies. It would advocate that people be allowed without restraint to create their own money ecosystems at a local level – as they choose. It might even advocate shutting down central banking – and the regulatory state that facilitates it – altogether.
We'll probably be waiting a long time for that one.