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Old 09-02-2014, 04:40 PM
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Default Fed: US consumers have decided to 'hoard money'

Fed: US consumers have decided to 'hoard money'

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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." 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).

They make one final point in regard to interest rates.

Fed policy, in which it has expanded its balance sheet to nearly $4.5 trillion by buying various debt instruments, including Treasurys, has driven interest rates lower. Under normal circumstances, the decline in 10-year Treasury rates would have pushed monetary velocity lower by 0.085 percentage points. Instead, it has declined 5.85 percentage points, fully 69 times more than models would suggest, the paper states.

This happened because the nominal interest rate on short-term bonds has declined essentially to zero, and, in this case, the best form of risk-free liquid asset is no longer the short-term government bonds, but money.

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.
Much more at Link, interesting article.
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Old 09-02-2014, 05:14 PM
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Default Re: Fed: US consumers have decided to 'hoard money'

Times are
Consumes were scolded for not being
Credit is much harder to get so people are saving to buy large ticket items!

Why do we need "experts" from the FED to explain the obvious?
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Old 09-02-2014, 05:49 PM
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Post Re: Fed: US consumers have decided to 'hoard money'

Quote:
Originally Posted by FrancSevin View Post
Times are
Consumes were scolded for not being
Credit is much harder to get so people are saving to buy large ticket items!

Why do we need "experts" from the FED to explain the obvious?
I think something cut off part of your sentences.
I think we agree (unless I read your statement wrong) that blaming the consumer on this isn't right.
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Old 09-02-2014, 05:50 PM
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Default Re: Fed: US consumers have decided to 'hoard money'

The International War on Cash - Joseph T. Salerno - Mises Daily

The US government's war on cash - CSMonitor.com

Quote:
Under cover of its multiplicity of fabricated wars on drugs, terror, tax evasion, and organized crime, the US government has long been waging a hidden war on cash. One symptom of the war is that the largest denomination of US currency is the $100 note, whose ever-eroding purchasing power is far below the purchasing power of the €500 note. US currency used to be issued in denominations running up to $10,000 (including also $500; $1,000; $5,000 notes). There was even a $100,000 note issued for transactions among Federal Reserve banks. The United States stopped printing large denomination notes in 1945 and officially discontinued their issuance in 1969, when the Fed began removing them from circulation. Since then the largest currency note available to the general public has a face value of $100. But since 1969, the inflationary monetary policy of the Fed has caused the US dollar to depreciate by over 80 percent, so that a $100 note in 2010 possessed a purchasing power of only $16.83 in 1969 dollars. That is less purchasing power than a $20 bill in 1969!

Despite this enormous depreciation, the Federal Reserve has steadfastly refused to issue notes of larger denomination. This has made large cash transactions extremely inconvenient and has forced the American public to make much greater use than is optimal of electronic-payment methods. Of course, this is precisely the intent of the US government. The purpose of its ongoing breach of long-established laws regarding financial privacy is to make it easier to monitor the economic affairs and abrogate the financial privacy of its citizens, ostensibly to secure their safety from Colombian drug lords, Al Qaeda operatives, and tax cheats and other nefarious white-collar criminals.......
seems they worry about losing control!
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Old 09-02-2014, 06:26 PM
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Default Re: Fed: US consumers have decided to 'hoard money'

Yep, that's where all the money is, and the gubmint wants it. "We didn't earn that!" Must be a bunch of conservatives clutching their money along with their guns and bibles. Don't they know that the Government will take care of them? Get out there and spend, you frugal money grubbers.
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Old 09-02-2014, 06:51 PM
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Default Re: Fed: US consumers have decided to 'hoard money'

The article seems incredibly obtuse to me...
Quote:
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.
"people" are supposedly doing this?
What facts / figures back this up?
Which people are supposedly doing this?

People still need to eat. They still need a roof over their head.
When Apple releases a new iPhone, do we see it sitting stagnant on the shelves?

Reading the article, it seems clear businesses are sitting on money.
I've previously posted an article demonstrating how some banks are taking the money from the fed @ 0%, and then turning around and buying bonds to make profit.

I would bet dollars to donuts that if more research were put into this article breaking down
* money spending over time by consumers, broken down into income levels, and
* money reinvested over time businesses...

I would bet you would find that the average person has NOT been "hoarding money".
As I've pointed out numerous times, a dollar in the hands of an average worker is better for the economy than the same dollar in the hands of a very rich person (because the average worker will spend more of that dollar).

This transition the article speaks of is most likely a result of
a) rising income inequality, and
b) businesses reinvesting less.
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Old 09-02-2014, 07:17 PM
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Default Re: Fed: US consumers have decided to 'hoard money'

I didn't read it but th answer is obvious. People were burned 5 years ago and are just getting back on their feet. Once burned you are far more careful. This is no conspiracy. It's just the result of being burned. Same thing happened following the first depression. I remember how frugal my parents and grand parents were and it was from seeing what happens when your institutions fail you, Ours sure did.
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Old 09-02-2014, 07:52 PM
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Default Re: Fed: US consumers have decided to 'hoard money'

Quote:
Originally Posted by foundit66 View Post
I think something cut off part of your sentences.
I think we agree (unless I read your statement wrong) that blaming the consumer on this isn't right.
Well it was fine on my screen when I hit submit.

Originally Posted by FrancSevin View Post
Times are tight
Consumes were scolded for not being frugal
Credit is much harder to get so people are saving to buy large ticket items!

Why do we need "experts" from the FED to explain the obvious?

I hope that clears it up.

Yes, don't blame the consumer for being frugal in tight times and instead saving for items we used to buy far too easily on credit.
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Old 09-02-2014, 08:02 PM
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Default Re: Fed: US consumers have decided to 'hoard money'

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Originally Posted by Mikeyy View Post
I didn't read it but th answer is obvious. People were burned 5 years ago and are just getting back on their feet. Once burned you are far more careful. This is no conspiracy. It's just the result of being burned. Same thing happened following the first depression. I remember how frugal my parents and grand parents were and it was from seeing what happens when your institutions fail you, Ours sure did.
I agree totally
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Old 09-02-2014, 08:03 PM
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Default Re: Fed: US consumers have decided to 'hoard money'

Quote:
Originally Posted by foundit66 View Post
The article seems incredibly obtuse to me...

"people" are supposedly doing this?
What facts / figures back this up?
Which people are supposedly doing this?

People still need to eat. They still need a roof over their head.
When Apple releases a new iPhone, do we see it sitting stagnant on the shelves?

Reading the article, it seems clear businesses are sitting on money.
I've previously posted an article demonstrating how some banks are taking the money from the fed @ 0%, and then turning around and buying bonds to make profit.

I would bet dollars to donuts that if more research were put into this article breaking down
* money spending over time by consumers, broken down into income levels, and
* money reinvested over time businesses...

I would bet you would find that the average person has NOT been "hoarding money".
As I've pointed out numerous times, a dollar in the hands of an average worker is better for the economy than the same dollar in the hands of a very rich person (because the average worker will spend more of that dollar).

This transition the article speaks of is most likely a result of
a) rising income inequality, and
b) businesses reinvesting less.
The economy does not run on food (one third of our take home, or McMansion housing. It runs and grows on big ticket items like cars & boats,, washing machines and refrigerators that make ice cubes for our drinks. High end stereos and entertainments.

For the last 7 years, Americans have been cut off from using their inflated housing to bankroll high living. And while some pent up demand is being addressed, many thoughtful American consumers are making do with the 5 year old or older car and the fridge with the broken ice maker.

I have a 20 year old truck and my newest car is a 2006. No car payments for years, money in the bank. A nice feeling actually.

But we did break down and buy a high ticket refrigerator last week. Why? Because the 6 year old Maytag won't make ice. LOL

*Meanwhile the 1977 Kenmore I gave one of my employees 6 years ago,,,,,is still running!!!! And it makes ice cubes!!!!
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