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Are US Consumers Evil Hoarders?
Submitted by Pater Tenebrarum via Acting-Man blog,
Another Keynesian Meme Dragged Up
A recent Fed paper reports that the Fed's wild money printing orgy has failed to produce much CPI inflation because “consumers are hoarding money”. It is said that this explains why so-called “money velocity” is low.
The whole argument revolves around the Fisherian “equation of exchange”, as you can see here. Now, it may be true that the society-wide demand for money (i.e., for holding cash balances) has increased. Rising demand for money can indeed cancel some of the effects of an increasing money supply. However, it should be obvious that there is 1. no way of “measuring” the demand for money and 2. the “equation of exchange” is a useless tautology.
Consider for instance this part of the argument:
“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.”
(emphasis added)
First of all, banks have not “put away” $2.8 trillion in reserves; in reality, they have no control whatsoever over the level of excess reserves. They are solely a function of quantitative easing: when the Fed buys securities with money from thin air, bank reserves are invariably created as a side effect. Credit can be pyramided atop them, or for they can be used for interbank lending of reserves, or they can be paid out as cash currency when customers withdraw money from their accounts. That's basically it.
Now imagine that a consumer who holds $1,000 in a savings account spends this money. Would it disappear? No, it would most likely simply end up in someone else's account. So the aggregate amount of money held in accounts is per se definitely not indicative of the demand for money either – it wouldn't change even if people were spending like crazy. Someone would always end up holding the money. Money, in short, is not really “circulating” – it is always held by someone.
This also shows why so-called velocity is not really telling us anything: all we see when looking at a chart of money velocity is that the rate of money printing has exceeded the rate of GDP growth (given that money printing harms the economy, this should not be overly surprising).
In Fisher's “equation of exchange”, V is simply a fudge factor. As Rothbard noted with regard to the equation, it suffers from a significant flaw:
“Things, whether pieces of money or pieces of sugar or pieces of anything else, can never act; they cannot set prices or supply and demand schedules. All this can be done only by human action: only individual actors can decide whether or not to buy; only their value scales determine prices.
It is this profound mistake that lies at the root of the fallacies of the Fisher equation of exchange: human action is abstracted out of the picture, and things are assumed to be in control of economic life. Thus, either the equation of exchange is a trivial truism— in which case, it is no better than a million other such truistic equations, and has no place in science, which rests on simplicity and economy of methods—or else it is supposed to convey some important truths about economics and the determination of prices.
In that case, it makes the profound error of substituting for correct logical analysis of causes based on human action, misleading assumptions based on action by things. At best, the Fisher equation is superfluous and trivial; at worst, it is wrong and misleading, although Fisher himself believed that it conveyed important causal truths.”
(italics in original)
“Velocity” of M2 – click to enlarge.
It is of course true that prices in the economy adjust to the supply of and the demand for money. However, low consumer price inflation by itself does also not really mean that one can infer that the demand for money must be exceptionally high.
What if e.g. the supply of goods increases at a strong rate? Then we would ceteris paribus have to expect the prices of goods to decline – if they instead remain “stable”, it is actually indicative of inflationary effects making themselves felt.
Moreover, prices never rise or fall at uniform rates. In today's economy, some prices rise at astonishing rates of change, such as for instance securities prices. These are not part of the consumer price index, but they are nevertheless prices. Their huge rise in recent years is an effect of monetary inflation – and if we were to attempt to infer the demand for money solely from their rates of change, we would have to say that the demand for money cannot have increased a whole lot. So you can see that things are evidently not as simple as “MV=PT” would have it.
In fact, the most pernicious effect of monetary inflation is precisely that relative prices in the economy shift and in the process paint a distorted picture that falsifies economic calculation and leads to capital malinvestment. Money always enters the economy at discrete points, and therefore changes in prices are like the ripples in a pond after a stone has been thrown in. First the goods demanded by the earliest recipients of newly created money rise…then the prices of goods demanded by the receivers who are second in line, and so forth. The earlier in the chain of exchanges one resides, the more likely one is going to be a winner of the process, the later, the more likely one is going to lose out (as more and more prices rise before the late receivers get their hands on the new money). Needless to say, the number of losers tends to be much greater than the number of winners.
Lastly, a sharper rise consumer price inflation may yet strike with a large time lag. There is no way of knowing for certain, but it wouldn't be the first time it has happened.
Money TMS-2. Obviously, the rate of monetary inflation has been vast. Economic growth meanwhile hasn't been much to write home about (hence “decreasing velocity”) – click to enlarge.
Why Hoarding Isn't “Bad”
Such reports is however do as a rule not merely attempt to explain why consumer price inflation is apparently low in the face of huge money supply growth (let us leave aside here that the “general price level” is in any event a fiction and cannot be measured. Let us also leave aside that the calculation of CPI such as it is seems highly questionable on other grounds as well). We may for the sake of argument concede that the demand for money (i.e., for holding cash balances) has risen on a society-wide basis after the 2008 crisis. Indeed, it seems quite a reasonable supposition.
The underlying theme of such studies is however invariably that this alleged hoarding somehow harms the economy, because economic growth is assumed to be the result of spending and consumption. This is a bit like arguing that the best way to stay warm is by burning one's furniture. In fact, this is a very good analogy, as burning the furniture will keep one warm for a while, just as people wasting their savings on consumption will for a while make aggregate economic statistics look better. That there might be a problem only becomes evident once all the furniture has been burned. Then it is cold, and there is nothing left to sit on.
Obviously, the argument that consumption drives economic growth is putting the cart before the horse: one can only consume what has been produced after all, so production must come first. If production must come before consumption, then investment must come before production and saving must come before investment. When people save money, nothing is miraculously “lost” to the economy. By saving more, people are merely indicating that their time preferences are lower – that they prefer consuming more later to consuming less in the present. Their savings can be employed to increase production, so as to enable this later, larger rate of consumption they desire. All that changes is the pattern of spending in the economy – more will tend to be spent on producer's goods and wages instead of on consumer goods.
What about genuine “hoarding” though? What if money is not kept in savings accounts, but instead stuffed under a mattress where nobody has access to it? Isn't that harming the economy?
The answer is actually no.
Let us assume a lone miser takes all the money he earns and stuffs it under his mattress. Given that this money is held in his cash balance and not being spent, prices in the economy must ceteris paribus adjust downward (assuming that no-one else's demand for money changes and that its supply remains fixed). However, all of this continues to fully agree with an expansion in production.
After all, our miser must have earned his money somehow, and he can only have earned it by producing a good or a service. The contribution he has made to the economy's pool of real funding remains “out there”. The fact that he subsequently hoards his money does not alter this fact. He could use his money to exercise a claim on other goods or services, and so consume the portion of the economy's pool of real funding he is entitled to on account of his preceding production. If he doesn't, then whatever he has contributed can be employed to expand production. The point here is: money is merely a medium of exchange. It is a sine qua non for the modern complex economy as there can be no economic calculation without money and money prices, but money is not what ultimately funds economic activity.
Just think about it: if one is stranded on an island without any real capital – i.e., without concrete capital goods – one can have suitcases full of money and will still be unable to fund even the tiniest bit of production with it.
Conclusion
In short, “hoarding” cannot possibly harm the economy. The same, alas and alack, cannot be said of money printing.

Nope, he doesn't harm the economy …
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hmmm... must have been a dud.
I down-arrowed all 3 for you since he hit all of mine... didn't want you to feel left out!
EDIT: Down-arrowed myself, too. For shits & giggles.
Diocletian, the coin-clipper, also complained of people hoarding money. He complained because they were not circulating the valuable coins such that his treasurers could clip them and make more coins from the clippings with a lower percentage of precious metals- the ancient equivalent of money printing.
This marked the end of the Denarius as a store of value, and invoked Gresham's Law. Everyone kept the valuable coins and traded the Denarius for anything ANYTHING of objective value.
I hoard fiat so that when SHTF, when I run out of toliet paper, I'll still have something to wipe with.
Propaganda teeing up “bail-ins” and ACH facilitated “wealth taxes”.
Saving (paying down debt) is considered hoarding. Sad comment on society.
Wow! The arrogance and/or stupidity of this commentator... QE only really benefits bankers and investors who are closest to the tap... and these individuals don't use this money in a productive way... the vast majority of this money is used in speculative high risk investments (gambling to you or I) rather than anything productive like loans to SMEs... as a result this money does not make its way back into the economy... it simply stacks up in these investors bank accounts... and because these individuals/companies have more money than they can actually spend in a lifetime!!.........
Meanwhile us 'normal' people (AKA alleged hoarders) are earning less and less, if we have a job.. so no not us, as we often have little choice but to spend all or most of our cash... just to make ends meet... these people!!! From another planet... clearly!!!
I shouldn't have hoarded all of my retirement savings. Should have blown it all on hookers and blow,
The Fed's observations ring true for me - I am keeping a lot more cash than I used to. What I don't understand is why the Fed seems surprised. I am not going to invest in another stock market bubble, nor in a bond bubble. CDs offer trivial returns, money-markets just about zero. And because my savings yield so little income - an explicit goal of Fed policy - the amount that I must save in order to provide for my old age, has vastly increased.
Perhaps it takes an ivy-league education, for this not to be obvious.
Food in the restaurants has dropped in quality in the past 7 years.
Movies? Feh! I have two AMC tickets I have not been able to use in two years.
Clothing in the stores - Cheap Chinese Shit that shrinks immediately upon washing.
Tools that break, screws that strip out if you try to take (Cheap Chinese Shit) electronics apart.
RE overpriced.
There is less to spend money on, of quality.
I remember the Philippines in 1984 - just before Marcos was ousted. As a corporal in the Marines I was a relatively rich man ... but the crap in the markets was not worth buying. The nation was gutted. The cannabis, San Miguel beer and pussy was cheap and good, however.
Seriously, our govt. in this country is hijacked and so is the media. It is just stunning what they are coming up with. This article being a case in point. They are encouraging the worst behavior and punishing the best.
let's not get too complicated about why people save money and why more people are saving more money today. people save money today so they will have money tomorrow. prudence explains it all or the rational human in econ terms. since the crash 2 things have provided incentive to have money tomorrow. one is the depression syndrome that can be easily tracked to your nearest depression kid(almost all the adults are dead). most people of that generation were frugal beyond reason by current standards having their money habits shaped by the depression. the same sort of response applies to today. the other savings impetus are retiring baby boomers.
savings used to be a very important part of the stability of an economy(japan) but as the reserve fiat currency vendor for the world savings are a hindrance to the buy everything now mantra that keeps the system afloat. so the fed report is correct from a central bankers' point of view. people are "hoarding" money and the savings rate is harming banker profits because money only makes money when it is spent not saved. money may be a medium of exchange but it is also a product itself.
This a great "analysis" of the Fed's "analysis". Lots of opinions regarding this either way. But what I see is a lot more "Hawkish comments" from FED members lately. Personally, I perceive we've been lulled into a sense of complacency for the past years regarding the FED and it's "slownes to act". My gut feeling is the FED is getting ready to "do something" about this, whether we all like it not. And they are going to do something... something BAD.
the fed is trying to jawbone demand. it is the old, "you better buy today because it will be more expensive tomorrow" sales pitch. the fed cannot, under any circumstance, allow a correction in any of the markets until the world economy comes back to normal. soooo, never. btfath
This a great "analysis" of the Fed's "analysis". Lots of opinions regarding this either way. But what I see is a lot more "Hawkish comments" from FED members lately. Personally, I perceive we've been lulled into a sense of complacency for the past years regarding the FED and it's "slownes to act". My gut feeling is the FED is getting ready to "do something" about this, whether we all like it not. And they are going to do something... something BAD.
fofoa dealt with a similar topic a couple of years ago
http://fofoa.blogspot.com/2012/02/yo-warren-b-you-are-so-og.html
Maybe people have realized that the accumulation of stuff is not the reason we are alive.
The reason you are alive is because your folks did the hokey- pokey.
Any reasons beyond that are highly speculative.
“Things, whether pieces of money or pieces of sugar or pieces of anything else, can never act; they cannot set prices or supply and demand schedules. All this can be done only by human action: only individual actors can decide whether or not to buy; only their value scales determine prices."
This is why you gotta love Rothbard.
Spare, clean, elemental logic that is so obvious once it's pointed out.
How many PhD economists out of 100 could build an argument on such a strong bedrock principle that would shape what was to follow?
Damn few, I would think. It's too simple.
Whether a saver puts his money in a bank or in his mattress DOES make a big difference to the overall economy. Putting it in the mattress provides no benefit after having reduced his consumption in saving it. In a bank, it becomes available for capital investment by others, thereby increasing productivity and total wealth in the economy. This is how capital accumulation occurred in the first place.
How can money be hoarded? One way or another money goes back to the banks for redistribution. If people buy bonds and equities then they buy them from a bank and the bank has the money to redistribute. If people put their money in a savings or checking account, it does not stay there, but instead is collateral for leveraged lending by the bank ... giving it a multiplier effect.
I cannot envision that people are hoarding dollar bills in their mattresses ... or is that what the author is claiming? That is the only hoarding that keeps money out of circulation.
If the velocity of money is down it is because people and corporations are not borrowing money, the banks are not lending it or the money is somehow getting trapped offshore in dead end accounts.
My money is parked in Alcohol, Tobacco, and Firearms.
Let's party like it's 1999.
The Next shoe to drop is the sound money people are causing the problem. They are looking for a scape goat to blame.
Hoarding = savers who do it a bit better