In ancient times, whenever there was a rise in war or political uncertainty, the human reaction was to hoard money. The hoard of ancient Roman coins 3rd century we purchased for study from Britain years ago reflected coins of both the Roman Empire and the Gallic Empire. Even the debased coinage was being hoarded. This is part of the deflationary cycle that must take place FIRST. It is the shrinkage of the money supply created by the hoarding that defeats what people assume should be inflationary. The age old problem remains the net effect – not the top down superficial theory. Watching the increase in the supply of money QE1-3 only produced massive losses. This results from the lack of understanding of the real driving forces behind the economy.
If government says it will increase the money supply by 10% and then taxes by 20%, the key to inflation is not looking at the total money supply, it is (1) the VELOCITY of money, which is the speed at which it is turning over within the economy (spending) and (2) the net disposable income. As velocity declines, hoarding rises. An asset bubble is created by a concentration of wealth in that asset class. This is the swing between the PUBLIC and PRIVATE confidence.
Currently, 29% of American households are starting to hoard cash as interest rates are so low, why let the bank hold your money? In Greece, there was massive hoarding of cash going on ahead of the elections. The hoarding of cash is on the rise and this dovetails into the record lows in retail participation in the stock market. Many people lost in the stock market 2007-2011 while the banks lost in the derivative-mortgage backed debt. Burn them once, and they look elsewhere. So retail participation in stocks is at record lows along with liquidity for historically the public will move from one sector to the other.by