In yesterday's post, I said:
Because our economy is still emerging from a recession, some people and corporations are hoarding money. This is what happens in a recession. The demand for money increases while the demand for productive assets decreases. For evidence, consider that Apple was sitting on $76.2 billion in cash as recently as July.Is Apple sitting on giant mountains of $20 and $100 bills? No. To do so would mean that Apple is sitting on $76.2 billion in currency. The term "cash" has several uses, but in a business setting we typically mean currency and extremely liquid assets such as money in a checking account. It's important to make a distinction between currency and bank deposits because banks will take the deposit and then make a subsequent loan. When the bank makes a loan, they are injecting money back into the economy. Therefore, if a corporation hoards cash, it doesn't automatically mean that they are pulling money out of economic distribution.
Banks, however, do not actually lend out 100% of the money they hold as deposits. Banks are required to retain a specific percentage of deposits in reserve which are simply called "required reserves." Required reserves help ensure that the bank will be able to pay depositors when they withdraw funds from the bank. In a normally functioning economy, the bank will lend out virtually all the deposits in excess of the required reserves in order to maximize their profit.
Banks are not required to lend out all the money they hold above the required reserve level. Additional reserves over the required reserve threshold are called excess reserves, and they are a strong indicator of a bank's demand for cash. If a bank is concerned that withdrawals are going to be exceedingly high (meaning depositors want currency over deposits), they will keep a higher level of reserves than is required. Additionally, if interest rates fall too low, then banks lose the incentive to lend as it is not profitable. With no incentive to lend, banks accumulate excess reserves as well.
The Federal Reserve provides information on banks' excess reserves, and currently they are extremely high. Our banks are holding almost $1.6 trillion dollars in excess reserves right now. Compare this to pre-crisis levels that typical remained below $10 billion! Are the banks hoarding cash? Yes, but only to a point. The large amounts of excess reserves are primarily a result of expansionary monetary policy by the Federal Reserve coupled with extremely low interest rates. This means that the Federal Reserve is effectively pushing cash into the banking system, but the individual lenders have no reason to lend the money out. The banks' demand for cash is greater than their demand for loans, and so the money is not reaching the general economy.
What does this mean in terms of the parable of the broken window and our current economy? Well, for starters, parables about broken windows probably shouldn't be used to explain banking. However, we can still conclude that cash is being hoarded in our economy. Businesses are hoarding cash primarily in the form of deposit instruments, which does not directly take money out of the economy. Banks are hoarding cash in the form of excess reserves, though, which limits the amount of money moving throughout the economy. What isn't so obvious in this equation is that banks are primarily hoarding cash coming from the Federal Reserve, not from depositors. Fiscal policy does not have the same limitations as monetary policy in low interest rate environments, but that topic will have to wait for another post.