CNBC recently ran an article titled “To the mattresses: Cash level highest in nearly 15 years”.
The article’s title does not actually explain its point. It only does so in a metaphorical way. It is not claiming that Americans are literally sticking wads of cash under their mattresses.
The article is talking about professional investors. Professional investors now have cash levels at 5.8% in their collective portfolios, which is the highest since 2001. This is according to a survey, so consider that there could be somewhat of a margin of error.
The article is interesting in the fact that it also states that 39 percent of fund managers now anticipate some kind of helicopter money. Too bad that “Helicopter Ben” Bernanke isn’t still around at the Fed to implement it.
But while the article briefly discusses professional investors, it doesn’t address whether the general public is putting cash underneath their mattresses.
Most Americans are not investors, unless you count retirement accounts such as 401k plans. But aside from investing, people still have a choice of what to do with their money.
At any given point of time, there is a set amount of money in circulation. The only thing that changes the money supply is the central bank and its balance sheet. Bank lending also has the equivalent impact, as fractional reserve lending increases the supply of money in the sense that more people are drawing upon some of the same money.
But it isn’t just the money supply that impacts overall price inflation. What also matters is how quickly money is changing hands. The Fed could print up a lot of money, but it wouldn’t result in massive price inflation unless people actually spent the money. If everyone just stuffs it under their mattress or in their bank account, then prices will stay down.
This is the demand for money. When the demand for money is high, it means people are saving it. It is the equivalent of stuffing it under a mattress. In our world of digital banking, most people don’t actually stuff it under a mattress, although we can be sure it still happens. But most money that is not outside of the country is not in physical cash. It is digits in bank accounts.
If the demand for money is high, it means people are buying fewer things. Stated another way, velocity is low. Money is changing hands less frequently. This has a deflationary effect on prices.
It is quite difficult to measure the demand for money though. It is almost an intuitive sense. During the artificial boom times of the mid-2000s, velocity was running higher. People were spending money. During the financial crisis, and perhaps even leading up to it, velocity dropped. People became fearful and some actually tried to save a few bucks for a rainy day.
It is very hard to sense where the demand for money is now in the United States. A lot of people have bought new cars. Housing has somewhat recovered, depending on the area. it is not 2009 any more. But it also isn’t 2004. There is still a sense of uneasiness, and probably rightly so.
Times are tight right now for middle class America. It is not necessarily widely admitted, but I have heard and seen enough on the streets (not literally). Even two-income households that should be doing well are struggling.
Price inflation has remained relatively low according to the CPI statistics. They are probably understated, but it is nothing like the 1970s. Still, wages are stagnant as compared to the cost of living. Technology gets cheaper, but health insurance and other basics get more expensive.
I think the velocity of money will likely drop in the near future. It will be part of the correction process if it is allowed to happen. Unfortunately, those fund managers anticipating helicopter money may be correct. If the Fed starts with another round of money creation, then velocity will likely increase. Velocity can pick up quickly if people think their money will depreciate rapidly.
A lot of libertarians/ Austrian school economists wrongly predicted high price inflation when the Fed was creating money like crazy from 2008 to 2014. They did not account for the lack of bank lending. They also didn’t account for the demand for money remaining relatively high.
This does not in any way make libertarianism or Austrian economics wrong. Maybe it made some of those people wrong on this subject. But monetary inflation is damaging because it enables increased government spending and misallocates resources. Higher prices is just one potential consequence.
I expect more Americans to stuff more money under their mattresses, literally and metaphorically, if they can find enough to actually save. If and when the Fed starts another round of quantitative easing or whatever you want to call it, then all bets are off.