Are US Consumers Evil Hoarders?

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).