According to the Federal Reserve, money market fund holdings of households has declined by about $380 billion since the end of 2008. (According to AMG, all money market mutual funds—institutional and retail—have posted net outflows of about $1 trillion over that time.) When we see big flows like that, we scratch our heads and ask what’s going on.
It’s not going into bank accounts. Checking, time and savings deposits are about flat over that time. Is it going into bonds, in the form of savings searching for more yield perhaps? Perhaps some of it, but the net outflows of cash from money market mutual funds dwarfs the net inflows into bond mutual funds. And despite the run up in Treasury holdings, total credit market investments by households is only up about $160 billion, or 4%, which is probably mostly capital gains and not new money. It’s not going into stocks, either. Indeed, there has been an increase of over 30% or $1.9 trillion in the balance sheet holdings of corporate equities and mutual funds shares, but that is likely all capital gains, too. AMG reports that flows into equity mutual funds has been almost zero over that time period. Yes, household debt is declining over the period, so there is a certain amount of principal repayment going on as part of the great deleveraging: from the end of 2008 home mortgages and consumer credit have declined by $429 billion on household balance sheets. With the rise in involuntary and strategic defaults, however, it is unclear how much of that debt is being paid off or just liquidated.
One possibility, of course, is that a lot of the drawdown in cash holdings by households is going into consumption. Take a look at the following two graphs (presenting data from 1959 through April 2010), which are variations on others we have run in the past. The first is a graph of the broad components of personal income—wages and salaries, income from assets, proprietors’ income and government transfer payments—versus consumption of goods and services. The ratio of these two lines is a little over parity right now. The second graph backs out government transfers from our adjusted income number, to show what working people basically have to live on before any government assistance. Without the government transfers, income only covers 88% of consumption. In the latest point, it falls short by $1.24 trillion (government transfers totals $2.24 trillion). Now, let’s make one more assumption: Two-thirds of government transfers is Social Security and Medicare, which mostly goes to the elderly. We would guess if these two graphs could be broken down by age so it excluded the income and spending of people over the age of 60, it would show an even deeper spending hole that is not covered by government transfers. That hole used to be filled by cash from borrowing, home equity extraction and realizing capital gains. Today, in the post-housing-bubble-tight-credit-world in which we live, we think it is being filled by that cash that is moving out of money market funds. But we could be wrong and would love to hear other ideas. Where is the money going?