Americans ‘Hoard’ Cash? It’s Probably Fueling the Shadow Economy

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.