Facts for Jame Bullard

Fact 1

Households and other retail investors have been increasing their holdings of FDIC-protected saving deposits at an usually rapid rate.  This surge in saving deposit growth starts during the crisis in 2008 and still is growing.  Since that time, households have acquired almost $2.4 trillion worth of saving deposits.

Fact 2

Households have been one of the biggest purchasers of U.S. treasuries over the past 4 years.  Through direct purchases,  households have gone from holding $264 billion in 2007:Q4 to $1.3 trillion in 2012:Q1.  If mutual funds purchases of treasuries reflect indirect household purchases, then household holdings have grown from $647 billion in 2007:Q4 to $2.2 trillion in 2012:Q1.  This is more than double the Fed’s increase in treasury holdings.  Only foreigners have bought more.  

Fact 3

Household holdings of liquid assets as a percent of total assets soared in 2008 and have yet to come down.  Household porfolios, therefore, are still inordinately weighted toward safe, liquid assets and have yet to undergo the type of portfolio rebalancing associated with a robust recovery  (i.e. a rebalancing of portfolios away from low yielding, liquid assets to higher yielding, riskier assets will spawn indirect effects on aggregate nominal spending via balance sheet and wealth effects and directly through purchases on capital.  See here for evidence on this portfolio channel).

Fact 4

Interest rates on safe assets are at historical lows.  Given the facts 1-3 above,  it should be evident that these low interest rates are  the result of an elevated, ongoing demand for safe assets.   As noted above, the biggest purchasers of U.S. treasuries has not been the Fed over the past four years.    So don’t blame the Fed.

Fact 5

Since the start of the crisis in 2008, movements in the stock market and expected inflation have been highly correlated as seen here.  This is an unusual relationship that only started during the crisis and continues to this day.  Thus, whatever caused it to happen in 2008 is still with us today.  The easiest interpretation that is consistent with facts 1-4 above is that spike in demand for safe, liquid assets that began in 2008 has yet to subside.  Here is why: any rise in expected inflation that would reduce this intense demand for liquid assets and thereby raise the expected future nominal income, would also raise expectations of higher future stock prices.  In anticipation of this development, investors buy stocks in the present (see David Glasner).  Thus, expected inflation and stock prices are currently related.  Since liquidity demand still remains elevated, there apparently hast not been a big enough increase in expected future nominal income to break this relationship.