Are American’s Stuffing $10.8 Trillion Under the Mattress?

Americans are keeping record amounts of their funds in cash and safe, low-interest bank and money market accounts. Does this so called "hoarding" represent a failure by the Fed to push people towards more risky, high-yielding assets? Rex Nutting argues it does in The 10.8 trillion failures of the Federal Reserve. 

Cullen Roche of Pragmatic Capitalism disagrees in "There Isn’t $10.8 Trillion “Stuffed Under Mattresses” Because of QE."   

Who's correct? Has the Fed’s ZIRP (Zero Interest Rate Policy) caused a speculative mania for risky, high-yield investments? Or has the Fed failed to push American investors into high-risk assets?

Rex reports data that suggests to him that the Fed's tactics have largely failed to ignite market speculation, contrary to what many believe (MarketWatch):

Data from the little-noticed financial accounts report show the American people have $10.8 trillion parked in cash, bank accounts and money-market funds that pay little or no interest. At the end of the first quarter, low-yielding assets totaled 84.5% of annual disposable personal income, the highest share in 23 years. Sure, people need to keep some money handy to pay their bills and some folks might have a few hundred or a few thousand in a rainy-day fund, but no one needs immediate access to the equivalent of 11 months of income. In essence, there’s $10.8 trillion stuffed into mattresses. That $10.8 trillion hoard represents a failure of Fed policy.

Since the Fed began quantitative easing in September 2012, U.S. households have socked away $1.17 trillion in their low-yield accounts. That means that 95% of the Fed’s $1.24 trillion QE3 ended up not in bubbly markets but in a safe and boring bank account. 

Let's assume Rex's numbers are correct. Let's say that $10.8 trillion is parked in cash, bank accounts and money-market funds, and that low-yielding assets total 84.5% of annual disposable personal income. Does his conclusion that 95% of the Fed's $1.24 trillion QE3 money ended up in a "safe and boring bank account" follow?  No.    

Cullen makes the argument that Rex's conclusion is based on a misunderstanding of how QE works:

I have to comment on this MarketWatch piece because I’ve now seen a number of people comment on it claiming that consumers are choosing to hold more low interest bearing assets in recent years. This just isn’t correct.

The article claims that Americans are stuffing $10.8 Trillion into mattresses and that QE has resulted in them simply saving all of this money…

[The notion that 95% of the Fed’s 1.24 trillion QE3 money ended in low yielding bank accounts] is a very common misunderstanding of how QE works and it results from the confusion over what is “money” and what isn’t.  So let’s get a few points out of the way first…

In fact, households are saving LESS of their income in recent years:

According to Cullen, Americans are not choosing to hold fewer T-bonds, but the Fed is "removing" the bonds (by buying) from the private sector via QE. If the Fed reversed QE, there would still be great private sector demand for the bonds. The Fed has changed the composition of private sector financial assets and forced investors "to look for other sources of safe interest bearing assets."  

Furthermore, Cullen writes, 

After all, that is one of the primary purposes of QE (in the Fed’s words, “to keep asset prices higher than they otherwise would be”).  Anyone who rejects this just hasn’t been paying attention to the 150%+ explosion in junk bonds in the last 5 years, the 6% compound annual growth rate in T-bonds since the crisis lows, the record low spreads in junk relative to Treasuries or the record setting levels of junk bond issuance. There is very clearly a high demand for higher interest bearing assets as a result of this portfolio rebalancing imposed by the Fed.

Yes, consumers are still spending too little to drive the recovery into a higher gear.  But it’s not because they have all this money stuffed under their mattresses.  In fact, there’s a good chance that the reduced interest income via QE has actually contributed to their lack of spending as a result of changing the composition of financial assets from safe high interest bearing assets like T-bonds to safe low interest bearing assets like deposits.  But the key here is that there isn’t necessarily more savings under mattresses as a result of QE.  The composition of that savings has simply changed.

Sources: 

Rex Nutting: The 10.8 trillion failures of the Federal Reserve (MarketWatch),

Josh Brown: The Chase for (no) Yield (The Reformed Broker),