Black Markets

Americans 'Hoard' Cash? It's Probably Fueling the Shadow Economy

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Money
401K2013/Foter

The Federal Reserve Bank of St. Louis wants to know where in hell all of the money injected into the system in recent years by the Fed has gone. Common assumptions say it was supposed to be a shot of Vitamin B in the nation's ass—the country's Gross Domestic Product should be floating upwards on the tidal wave of dollars, with inflation soaring along. But that's not happening. The reason, conclude Yi Wen, Assistant Vice President and Economist, and Maria A. Arias, Research Associate, "lies in the private sector's dramatic increase in their willingness to hoard money instead of spend it."

Could be. Maybe all of the money is sitting in duffel bags under the bed. Or maybe other economists are right that money is pouring into a vast shadow economy that runs parallel to the official one, but out of reach of regulators and tax collectors.

What has the Federal Reserve analysts fascinated is that dollars just aren't running through the system the way they used to. "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 just prior to the recession."

If old assumptions held for the circulation of money, "inflation in the U.S. should have been about 31 percent per year between 2008 and 2013." Instead, it was less than 2 percent by official measures. Damned good thing, too, unless you really dig wheelbarrows.

That's because, say the authors, interest rates are so damned low as a result of Fed policy, and the economy so sluggish, that people are just sitting on cash instead of spending or investing it.

Just sitting on money?

Maybe. But another explanation was put forward by the economist Edward Feige, who argued recently that a lot more cash than traditionally assumed is circulating domestically. Where others estimated that half or more of all U.S. currency flows overseas, he said 75 percent or so is actually at home.

Again, is it just sitting there because of low interest rates and economic doldrums?

Nope. Feige estimates that, in 2009, "18-23% of total reportable income may not properly be reported to the IRS." That missing $2 trillion or so makes for a rather lower income tax compliance rate than the official 83.1 percent estimated by the IRS.

Which is to say, according to Feige, the money isn't being hoarded (although some is certainly stashed for a rainy day), but it's being channeled into the shadow economy of otherwise legal goods and services to escape taxes and regulations. Much of it probably flows to outright illegal black market activities, too. But the huge increase in cash in private hands suggests less in the way of massively increased demand for hookers and blow than it does a growing parallel economy.

The Federal Reserve economists don't go there. But their questions about where all that money has gone are very interesting. And it makes more sense that it's being put to some sort of so far untracked use than that it's all just gathering dust.

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  1. Great, hoarders. Next up, wreckers.

    1. I presume it was an innocent error that you left Kulaks off the list, da comrade?

      /NKVD

      1. Dear Comrade Servator, I am a faithful soldier of the Revolution. I did not mention the kulaks simply because I assumed they were already dead. For this I apologize, as our watchfulness against the bourgeoisie must continue unabated and every stronger.

        1. Good. Make sure Party dues are paid up.

  2. People save more when they are uncertain about their future prospects. Gee, why would anyone view the future with uncertainty and caution?

  3. Hookers and blow, duh.

  4. How many people who lost their jobs are now doing work for cash by the job? How many of those people report it all, or even know what the total is?

    1. How many people who have on-the-books employment take side jobs for cash, sell stuff on ebay, yard sale, etc?

      1. And if you do, do not tell your poor CPA.

        1. My CPA doesn’t even like it when I do legal tax avoidance. He usually plugs his ears and starts yelling “LA LA LA LA LA LA I CAN’T HEAR YOU…..”

          I need a new CPA.

          1. I know where a Certified Public Asskicker hangs out…

          2. Ditch the cartel. CPAs’ first loyalty is to the state, for whom they owe their very existence. Hire an independent tax preparer. Maybe an EA if he’s not a former IRS stooge.

            1. 🙁

            2. CPAs’ first loyalty is to the state, for whom they owe their very existence.

              You have the wrong CPA then. My first loyalty is to my company. The AICPA, not the government is responsible for the existence of CPAs.

        2. Who needs a CPA? If it’s all cash, they’ve got a 1040-EZ for you.

          1. An S-Corp partial owner with real estate.

    2. How many of the newly insured exchange consumers were uninsured before last year? Some questions are just unanswerable, forever mysteries of the universe.

  5. out of reach of regulators and tax collectors

    You really are quite the tease, aren’t you, 2Chilly?

    1. When I do businesses with small non-chain shops, I pay cash as often as possible, on the grounds that this gives them the opportunity to not report the income. I don’t ask if they do, I don’t offer the chance or explain why, I don’t ask for discounts. The less I know, the better off. But I sure hope they take the hint.

  6. Vitamin B? Don’t you mean vitamin G?

  7. “That’s because, say the authors, interest rates are so damned low as a result of Fed policy, and the economy so sluggish, that people are just sitting on cash instead of spending or investing it.”

    Hoarding cash is a rational response to uncertainty. Maybe fed policy is actually causing people to sit on cash as they are unsure of the wisdom of our new central banking overlords.

    1. The article I read on CNBC mentioned that in the last paragraph. ” The Fed pair go on to make a fairly stunning indictment of sorts about Fed policy: 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).”

    2. When you make 0.15% on your bank savings account, keeping it under your mattress is a lot safer and pays about the same.

  8. the velocity of the monetary base was at 4.4, its slowest pace on record.

    And lemme guess, the records don’t go back very far.

    I thought it was pretty well known that corporate bonds are in bubble territory, and possibly Treasuries as well. If there’s a desire to burst the bubble on these investment vehicles – and I’m neither for nor against that – one must first ask how that is going to affect pensions and retirement accounts.

    The US Federal Reserve Bank – pushing on a string since 1913.

    1. I thought it was pretty well known that corporate bonds are in bubble territory

      HAHAHAHAHA! Well known to anyone with an ounce of economic literacy, which leaves out central bankers. When in history has a central banker ever been able to spot a bubble?

    2. All of my major competitors live off their commercial bonds and underprice their services. Personally, I cannot wait for them to eat shit.

      1. How do they do that? How much fucking cash do they have? What industry are you in?

  9. This is why the state must spend people’s money for them.

  10. I know.
    All the money is hiding down in the depths of the ocean!

    1. Cooling the Global Economy?

      1. …until it approaches absolute zero…

  11. I don’t think people are hoarding as much as the banks are
    http://research.stlouisfed.org…..es/WCURCIR
    vs.
    http://research.stlouisfed.org…..es/WRESBAL

    1. Yeah, I was wondering about that too.

  12. Cash is king when you’re in a depression.

    1. Your death therapy cured me.

  13. I find this article confusing. Are we talking about physical currency here or about the total number of dollars out there? Has there actually been an unusual increase in the amount of cash to go along with the inflation of the total money supply?

    1. It also doesn’t help that people use “cash” both to specifically refer to physical currency as well as to assets that are readily accessed as money and not in stocks, bonds, etc.

    2. I’ve been having the same problem in reading the article. Does this refer to the greenbacks that someone has stashed away in case of whatever, or a chunk of electrons in memory at the bank?

    3. I think because they’re using 4.4 as a multiplier, they mean all supply, not just cash. But, I’m not 100% certain on that.

      I don’t think cash, as in dollar bills, has gone up. Although, if so much of the economy has gone underground wouldn’t the demand for cash have gone up astronomically too?

      I think the real reason is money flows overseas way faster than it once did. Pretty much all small items manufactured come from overseas these days. At least in my area.

  14. Sounds like we need another round of quantitative easing.

    The best way to drive hoarders back to the market is to debase their currency.

  15. Central bank clowns gonna clown.

  16. Yep, we’re all Scrooge McDucks just swimming in our money bins.

  17. Wait a second who has cash?

    Personally, I think the government has changed their leverage requirements dramatically, and regulated the risk profiles the banks can have so the banks are hoarding cash, because the government has made impossible to do anything else except park it in treasuries.

  18. We recently sold an apartment we owned for many years in NYC. We’d been renting it to a friend who decided to retire to FL. The difficult wasn’t in finding buyers at our asking price – we received 5 cash offers at or above our list. The issue was finding a buyer who the co-op would approve – who had verifiable income in the form of bank and tax statements. Many applicants had the cash in hand but had no proof of income. The failed applicants were either Russian/Eastern European or Asian.

    So, yeah, there’s tons of money sloshing around in the economy that is completely black market.

  19. Who has cash to hoard? Thanks to a wage freeze and the Unaffordable Care Act, my take home pay is down a hundred dollars a week from where it was three years ago. Four hundred bucks a month is not a trivial amount of money, and everything costs more to boot.

  20. Feige estimates that, in 2009, “18-23% of total reportable income may not properly be reported to the IRS.”

    Those people are stealing from the government.

    I haz a horror.

  21. This doesn’t make sense. About a week or two ago, wasn’t there an article posted on Reason about how people are saving less and have more debt? Then they can’t be hoarding cash (unless they’re stuffing it under a mattress and not using it to pay bills). I think the other comments are right about the banks hoarding cash.

    1. Yeah, but do you really think the Fed is going to blame the banks? It’s Kulaks and hoarders!

      1. No love for wreckers? I am disappoint.

    2. The visible economy is characterized by less on-the-books cash and more debt.

      The gray/black economy is characterized by more cash and more activity.

      That cash you take out of your bank account for your gray/black market exits the visible economy and makes your savings look smaller, while your off-the-books activity increases.

      These strike me as completely consistent.

    3. I can think of at least 1 other reason it doesn’t make sense: If the measured velocity of $ is down because of its circul’n underground, and that’s given as an explanation for the lack of inflation in the face of a big increase in money & credit supply, that works only if goods in the underground economy aren’t competing for sale with goods & $ in the above-ground, measured economy. If goods are moving more in response to underground $, they’d be scarcer above ground, hence above-ground prices would be higher. So unless these economies are somehow walled off from each other, the explanation doesn’t make sense.

      Therefore I buy the more traditional explanation that the overall velocity of $ is actually down, not just driven off the books. The supply of $ is up, but so is demand for it because people are hoarding it, so $ aren’t devaluing much.

      1. No, the above ground prices have to be lowered to compete with the black market prices, where no taxes are levied.

  22. The reason we dont have growth is that the Fed et al are fighting inflation. With the growth in M0, M2 would be through the roof if the velocity of money increased.

    When the economy improves, velocity increases, M2 rises and they shut it down to prevent runaway prices.

    Like I said in 2008, we would be bouncing in and out of recession until at least 2020. And probably longer.

  23. When the economy improves, velocity increases, M2 rises and they shut it down to prevent runaway prices.

    Like I said in 2008, we would be bouncing in and out of recession until at least 2020. And probably longer.

    Brain surgery with a chainsaw is totally within the realm of possibility. You just have to be a Top Man.

  24. Most of the money the Fed issued went into the financial sector, not the production sector. It inflated the values of financial instruments, not goods and services. When the financial sector collapses, as it must, investors will flee and try to put their money into “commodities” (hard assets), and then we will see hyperinflation.

    There is hoarding going on, but it is not of cash, but things like derivatives.

    1. Of course. They know exactly where the money went, to the people who have first access to it. It never left Wall St.

      But the larger issue is what the hell are they doing trying to cause inflation when the largest demographic (the boomers) are beginning to retire? We already know they didn’t save enough, and the FED wants to punish them even more by making the little they did save worthless? Not to mention my parent’s generation (depression/WW2 babies) who are starting to get to the “expensive” part of life when medical care and assisted living start to become necessities. At least they managed to save and still have pensions.

  25. Yeah, but keep in mind…”injecting into the system” just means it goes to the banks. It’s not like the Treasury Department chartered an airplane and dropped bundles of cash out the door to whomever could grab it.

  26. Assets are sky high, the housing bubble has been reinflated, and the Fed continues to pay interest on reserves, and they’re wondering why money isn’t flying around the economy in sufficient quantities to create $10 gallons of milk?

    Now might not be the very best time to invest in a particularly roundabout capital project.

  27. As a person who has traveled to many other countries, my belief is that money is currently circulating in the economies of Russia (and eastern Europe), China and India. Most people have no clue of the enormous amount of U.S. $100 bills that exist in those countries. It is growing by leaps and bounds in African countries also.

  28. If old assumptions held for the circulation of money, “inflation in the U.S. should have been about 31 percent per year between 2008 and 2013.”

    And if the economy ever escapes from the doldrums, it will be. So, depression or hyperinflation?

  29. If the price of a fucking bag of potato (potatoe) chips has doubled since 2008 then we know the inflation numbers are fudged. The cash is in ‘Special Reserve Accounts’ and the interest is going to things like, say, THE STOCK MARKET, PRECIOUS METALS, LUXURY REALESTATE etc., etc. No inflation? Yeah right. Just enough to hide. It’s a trust fund for shitty bankers.

  30. I See Nothin’. I Hear Nothin’. I Know Nothin’.

    The beads on my abacus is broken.

  31. What planet is JD on?
    Who isn’t aware that the money was given to banks and industries favored by this regime?
    It certainly wasn’t given to individuals, we would have spent it on debt and just plan living expenses.
    Ask yourself: Who do you know who has so much money, so little need, that they have the luxury of sitting on a pile of cash?
    No-one I know… they are living paycheck-to-paycheck, at best they have a few months buffer.

    This is propaganda. The endless printing of money does one thing and one thing only: it monetized the debt.
    It devalues our fiat paper currency to cover irresponsible, out-of-control spending.

    JD, there aren’t too many people left like you scratching their heads over where the money went.

  32. I hope this shadow economy grows into a full-blown agorist revolution.

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