Pragmatic Capitalism

Practical Views on Money, Finance & Life

There Isn’t $10.8 Trillion “Stuffed Under Mattresses” Because of QE

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:

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.”

This 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:

  • When the Fed implements QE they are not increasing the QUANTITY of savings in the economy.  To keep things simple, the Fed swaps a bond for bank deposits.  The private sector’s quantity of net financial assets doesn’t increase, but its composition does change (from safe interest bearing assets to safe low interest bearing assets).
  • The Fed, by buying the bond, is temporarily removing it from the private sector which results in an increase in deposit liabilities (and assets), but also reduces the quantity of T-bonds.  This is the equivalent of the Fed unprinting a T-bond and a bank (acting as the middleman) printing a deposit.
  • Since the Fed remits interest income to the Treasury every year (which reduces the budget deficit), the private sector is losing all of this interest income it would otherwise have earned (which has been about $100B per year for the last 5 years).
  • You can point to an increase in deposits as a sign that people have more short-term assets, but we should also point out that they have fewer long-term assets.  None of this increases the quantity of savings or means that households are saving more.  In fact, households are saving LESS of their income in recent years:


But the most important point here is that households are not choosing to hold fewer T-bonds.  The T-bonds are being removed from the private sector by the most powerful entity in the economy.    If the Fed were to reverse QE tomorrow there would be no shortage of demand for T-bonds in the private sector.  Just look at how voraciously the private sector has driven down yields in recent years.  The private sector can’t get enough US government bonds.

Changing the composition of private sector savings doesn’t mean the private sector has chosen not to hold these assets in aggregate.  It just means that the Fed has succeeded in altering the composition of private sector financial assets.  And that, by definition, has forced investors to look for other sources of safe interest bearing assets.  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.


1.  Sack, Brian – Managing the Federal Reserve’s Balance Sheet

2.  Roche, Cullen – Understanding Quantitative Easing


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