In the wake of the Great Recession and the worst financial crisis since the Great Depression, worried Americans are hoarding more cash than at any time in the last 25 years. According to the Fed, US households are sitting on $2.15 trillion in checking and savings accounts – about a 50% increase over the past five years.
And this does not include any cold, hard emergency cash that most households have hidden “under the mattress” or wherever. The question is, why?
Most analysts attribute this phenomenon to three things. First, that debt-burdened Americans have worked hard to clean up their personal finances and credit since the recession ended five years ago. Second, with savings accounts paying next to nothing and a lack of attractive investment alternatives, many American have chosen to let their checking accounts build. Third, many are holding back cash awaiting a meaningful pullback in stocks.
A report from bank consulting firm Moebs Services Inc. calculated the average balance for US consumer checking accounts was $4,436 at the end of last year – more than double the average of $2,100 over the 25 years the annual survey has been taken.
During good economic times, when unemployment and inflation are low, the average balance in consumer checking accounts is about $1,400, the survey noted. However, when times get difficult, the consumer sits on the sidelines and checking balances get larger, normally up to about $3,000, the report said.
Yet as just noted, almost five years since the Great Recession ended, average checking balances had surged to over $4,400 at the end of last year.
By contrast, free-spending Americans had allowed their checking accounts to drop to an average of just $788 in 2007, the last year before the near-meltdown of the nation’s financial system, according to the survey by Moebs.
The Moebs report, previously confidential for its clients, is fresh evidence of how the devastating economic downturn worldwide has changed consumer habits, especially on spending and saving.
As people have been cleaning up their financial houses, they have only slowly increased spending. That has helped to slow the recovery because consumer spending represents over two-thirds of economic growth.
One of the great mysteries of the post-financial crisis world is why the US has lacked inflation, given the trillions of dollars the Fed has pumped into the economy through quantitative easing. The St. Louis Fed thinks it has the answer which they outlined in a new research report published this week.
That report blames the low level of money velocity in large part on consumers and their willingness to hoard money. The report also cites the Fed’s own zero interest rate policy (ZIRP) 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 its target rate of 2-2½% that would need happen before interest rates will be pushed higher.
That hasn’t happened despite nearly six years of ZIRP and the Fed pushing its balance sheet to nearly $4.5 trillion in government bonds and mortgage-backed securities.
The St. Louis Fed report ponders why the huge increase in the monetary base did not cause a proportionate increase in the general price levels (inflation) or in Gross Domestic Product. The report concludes:
“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.” [Emphasis mine.]
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 [times] 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.”
Surprisingly, the report comes very close to criticizing the Fed itself for holding short-term rates near zero for too long, and suggests this is a big reason why consumers are sitting on so much cash.
It will be interesting to see if this new report will be discussed at the next Fed policy meeting on September 16-17.
So why do you think consumers are sitting on their cash? Post your comment.
Gary,
I may or may not be guilty of having too much cash. However, I would not use the word “hoarding.” After about 8 exchanges with Phil Denney (with whom I have a lot of trust) the last two day, this morning I asked myself whether I may be reaching too much to move some money we have saved the last two years to a new joint account at Wellesley where we have seen good growth since our initial investments 11/2011. We have other accounts at HWM also.
The reason we may not be spending as much as we may be able is “uncertainty.”
Where is inflation going? Social Security is tied to an unrealistic number. My retirement check is fixed for life and deflation would be a good thing as I might then be able to buy more, not less. My wife’s check comes from one of the most underfunded retirement systems in America because the State of Illinois “borrowed” money from the Illinois Teachers’ Retirement (the money that had been withheld from teach checks) and is now unable to repay. It is their deferred income and we don’t know whether we will get a check next month or not – probably will, but their is uncertainty.
Where are taxes going? I have the good fortune of being in a higher tax bracket since we retired because we both put the maximum allowed by law into our 403b accounts. Obama thinks we are rich, but I worked 60 hours a week for 40 years and saved half of what we earned. Now he wants to give it to people who find it easier to collect food stamps than to work. I understand, I cleaned barns until my hands bled when I was in high school, de-tasseled corn from the ground with cuts on my arms and face from the leaves and the heat was so bad it was hard to breathe, and many other things that you have not the time to read. I also retired in 2010 after working for the Boy Scouts of America for 38 years and was business manager of the 25th largest Boy Scout Council in America. We had surplus income in 24 of 25 years. I think that I understand a little about making budgets and projected both income and expenses (except 2008 – 2009). The “gentlemen” that manage the Boy Scout defined benefit plan lost 40+% during then last crash and make excuses why the unfair accounting rules are putting them at 80%. More uncertainty.
Is the money in our IRA safe from the sticky fingers in Washington. Maybe. More uncertainty.
Thank you for your letters. Some day I hope to get to meet both you and Phil in person. Until then, keep those letters coming.
Dear Gary,
The only confidence I have in the Obama administration is that they want to destroy our great nation. Obama never intended to improve our country. He wants to humble us and wipe out our great constitution. He wants us weak so we have to turn our great country to the the UN and thus to be like the rest of world. I believe many if not most of our people know this because it is so obvious.The exception is the politicians, the media, the elite class, the “political correct.” They must be demonically possessed not to recognize what is happening to our great country. We are being turned over to the world. Our people know this and are afraid and there for the low velocity of the money. There are expert voices like James Rickards who are telling us that our money will become worthless. We need to turn it into the essentials or lose it.