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The Federal Reserve Thinks You’re ‘Hoarding’ Cash

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Unread 09.04.14, 03:23 AM
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The Federal Reserve Thinks You’re ‘Hoarding’ Cash

09.03.14 09:01 PM

Economic officials claim that Americans are “hoarding” money in an analysis out from the Federal Reserve Bank of St. Louis that attempts to explain why inflation is lower than expected even after the central bank* pumped massive amounts of money into the economy.

The authors of the Fed paper note that the central bank’s easy money policy in recent years has failed to produce expected levels of GDP growth and accompanying inflation.

“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,” the Fed officials say in the paper.

The economists say in their research that every dollar in the monetary base was spent only 4.4 times in the economy during the past year as of 2014. Just prior to the economic recession that number, known as the velocity of the monetary base, stood at 17.3.

“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,” the Fed researchers say. “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.”

While the economists say private “hoarding” of money likely resulted from a gloomy economic outlook coupled with low interest rates forcing investors to adjust portfolios in favor of “liquid money and away from interest-bearing assets such as government bonds.”

“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),” the Fed officials write.

The post The Federal Reserve Thinks You’re ‘Hoarding’ Cash appeared first on Personal Liberty.

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