Has the Fed printing press resulted in a mountain of cash that may inflate prices?
'Wall of US cash still looking for home
The financial market panic of 2008 was characterised by a huge stampede into cash. Indeed, the surge into cash-like investments such as short-dated US Treasury bills was so strong that investors were content to lose money on these holdings, which essentially paid negative interest rates for a while.
Using US money market mutual funds as a proxy for demand for cash, this trend continued until March this year, when money fund balances peaked at $3,760bn. This peak, of course, coincided with the start of the rally in risky assets, which has lifted everything from equities to corporate bonds.
Since then, $560bn has flowed out of these money market funds, according to analysis by JPMorgan. The balances are still quite high. Indeed, despite the outflows, there is still $1,000bn more in money market funds than in early 2007.
It is not just such measures of cash that show balances to be high.
Data released by the Federal Reserve show that private cash holdings by households and companies as a percentage of nominal US GDP is just shy of 72 per cent, or about $10,120bn, as of the second quarter of 2009. The US household sector currently holds about $7,760bn in liquid assets. These cash balances are higher than the previous peak in the 1980s.
With returns on money market funds still low – the interest paid has barely turned positive – there are plenty of market watchers who expect the money to keep moving out of cash and prop up buying of stocks, corporate bonds and other assets with higher returns.''