Jorg Aadahl (Letter, “Anti-social hoarding?” from the May 8 edition of the Daily Journal) is confused about the nature of money and the consequences of “hoarding” it.
Money is different from real goods and services. When people, corporations or banks choose to hold more money the effect is lower prices, other things being equal. Conversely, if they begin to spend their “hoards” the effect is higher prices. If injections of money were the cure for our economic doldrums, the Fed’s vast expansion of the base money supply over the last few years should have done the trick. Instead we’ve been having a very sluggish recovery and nagging unemployment. I believe the primary reason for those doldrums is regime uncertainty — what will be the real impact of Obamacare next year; what will Dodd/Frank do to business when it takes effect; what new taxes will be foisted on the most highly productive people? Together with credit contraction, those effects have more than canceled out the otherwise inflationary effects of Fed expansion.
One reason why U.S. corporations have so much cash parked overseas is our convoluted tax system. The United States is the only major country which taxes both the domestic and foreign income of corporations. And incidentally, corporations don’t really pay taxes; people do — shareholders, employees, customers.
Finally, what about commercial banks, which hold well over a trillion in excess reserves? They are not lending this money primarily because they don’t see good loan prospects and incidentally because the Fed now pays interest on excess reserves.