Money Hoarding Versus Reserve Hoarding

Jesse Eisinger, in a provocative article in today’s New York Times, purportedly summarizes an argument on Fed policy between hedge fund managers and economists. “After several such managers at a recent conference denounced the aggressive money-printing policies of Ben S. Bernanke . . . the economic blogosphere rose up to mock them.”

According to the author, “Many hedge fund managers have been predicting that high inflation and fleeing creditors would send interest rates skyrocketing.” “And they have been wrong. Those silly hedge fund managers. They don’t understand macroeconomics! As Paul Krugman (and many others) have explained, the lack of demand explains why there isn’t any inflation and why interest rates haven’t risen despite all the money-printing.  [Underline added.]

I’m not questioning the author’s characterization of the debate. However, I am saying that if he has it right, then I believe both sides are wrong. The hedge fund managers have it wrong because their whole argument is based on a false premise: that the Fed has been printing lots of money. That simply isn’t true as I have argued in recent posts.

As of today, according to the H.6 money stock series release of May 9, M2 growth has been 6.9% over the 12 months ending in March 2013, 5.9% over the past 6 months, and 2 percent over the past 3 months. These relatively low numbers (under the circumstances) must be interpreted alongside the average 3 to 3 ½ percent decline in M2 velocity of recent years. Roughly speaking, the percentage growth in the money supply plus the change in velocity has yielded a 4% growth in total spending and nominal GDP. (Less lately.)

“Despite all the money-printing” underlined at the end of the second paragraph above is fiction. The slowdown in money creation (not printing) has been accompanied by a slowdown in inflation. Today’s CPI showed a decline of 0.5% in April and only a 1.1% increase over the past 12 months. It is high inflation that produces high nominal interest rates.

I have made these arguments many times before, apparently to no avail. My main purpose here is to address the argument, attributed to the economist side of the debate that “the lack of demand explains why there isn’t any inflation and why interest rates haven’t risen despite all the money printing.” If that side believes that there has been excessive money printing and yet we have a lack of demand, logically they must be assuming a plunge in the velocity of money proportional to the explosive money printing. The velocity of money is a reflection of the demand for money. A dramatic drop in its velocity implies a dramatic increase in the public’s desire to hold money balances. There is no evidence of that. The problem is not a dramatic plunge in V; instead it is an only modest growth in M. The public is not hoarding money; the banks are hoarding reserves.


Comments (12)

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  1. Marvin says:

    … the banks are hoarding reserves.

    And why would the banks be doing that, Professor?

    (Question repeated from earlier article.)

  2. Pete says:

    In your own publication a few months back you showed bank reserves at ~10 times the required amounts. Considering that the whole point of QE was to increase inflation, wouldn’t the lack of velocity indicate that perhaps banks aren’t lending — despite any derived demand?

  3. Pete says:

    And… I just got to the bottom of your article.
    Silly me.

  4. Nigel Molesworth says:

    If anything, interest rates should be decreasing, because of deflation (as presented in the CPI statistic.

    The Hedge fund managers aren’t completely wrong though, the basis of their argument could be true under substantially harsher circumstances in regards to inflation.

  5. Daniel Deronda says:

    While hedge fund managers could be right in a dystopian world where the government allows the federal reserve to print money out the wazoo, the Fed doesn’t. It is pressure not too. Inflation has now become this red button word in the media, and is mainly attached to alarmist rhetoric.

  6. Johnathan Craeten says:

    Do people not realize that Ben Bernanke only says things just to create more room for his Keynesian agenda?

  7. Greg Dinkleburt says:

    “…logically they must be assuming a plunge in the velocity of money proportional to the explosive money printing”

    This is a great point. Monetary Velocity is constantly fluctuating, so for economist to be making claims such as these they would have to be adjusting inflation every second of every day, which is impossible.

  8. Andrew says:

    Not to discredit the important work economists due, but our contemporary economic system is a joke. No matter how intricate you make it, the bottom line is that the system itself is laughable by objective measures. What is all this money we are talking about? Numbers, simply numbers, while production and distribution are manipulated by these numbers, is not in my eyes a fair nor logical system. Don’t mean to deviate so much from this important post’s topic, but I am a little tired and fearful of where we’re allowing all of this to go.

  9. Sam says:

    If demand is high, how will the consumer pay for these services? Essentially, the currency we hold is merely deemed valuable by reputation — it doesn’t really hold any material value whatsoever. In this sense, the Fed can stimulate the numbers all it wants and call it quantitative easing or come up with new methods all it wants, but our underlying economic issues won’t be solved that way, I don’t think. One day people will be forced to start producing in the labor force and stop speculating so much.

  10. Simeon says:

    Inflation is simply not as big a problem than was originally thought.

  11. JD says:

    Inflation is a HUGE problem. We haven’t seen it, true, but the massive creation of reserves has the potential for astronomical inflation. We are sowing the seeds of the greatest economic disaster the world has ever seen.

  12. Pete says:

    Quantitative easing is designed to increase inflation.. that was the whole point.