> Rich people do not hoard cash. They invest it, all of it.
Did I not make that clear? I said that they "don’t appreciably change their expenditures except of course on finance (sic) assets, which observably have inflated like crazy."
I dislike the lazy and misleading usage of "investing" for a simple asset swap of cash for already issued financial assets, even though that's what most people mean by the term. That is a savings reallocation. Investing is when you actually allocate new capital, so for example buying into an IPO, a public offering, angel investing, buying equipment, and so on.
> Rich people do not hoard cash. They invest it, all of it. Even money deposited in a bank account gets invested, as the bank loans it out.
Banks don't loan deposits, but rather loan origination creates deposits. You're a very smart guy, take some time to learn how the banking system actually works.
> There are no Scrooge McDuck cash vaults.
The Federal Reserve Bank of New York has entered the chat.[1]
>> Rich people do not hoard cash. They invest it, all of it.
> Did I not make that clear?
You wrote: "ultra high net worth persons who mostly hoard it"
> Banks don't loan deposits, but rather loan origination creates deposits. You're a very smart guy, take some time to learn how the banking system actually works.
The banks cannot loan money out unless they have reserves on deposit. Yes I know about fractional reserve banking, but those reserves come from deposits. That's why banks give out free checking. They can loan a multiple out of the cash on deposit. It's also why they have minimum deposit levels.
Take some time yourself :-)
"No individuals or private sector entities are permitted to store gold in the vault." -- from your cite
> You wrote: "ultra high net worth persons who mostly hoard it"
I thought it was clear that the sentence after modified that.
Although you need to ask yourself, when those UHNWIs spend a billion dollars cash on stocks and bonds, where does that cash go? It doesn't just disappear into the ether, it becomes the seller's deposit, and now the seller is holding the cash. So yeah, at the end of the day (literally, payments settle at the end of the day), somebody is holding that cash, and that somebody is the ultra rich and banking institutions, trusts, and various other entities that they own, with public pension funds taking up some of the slack. It's much clearer if you stop think of it as "investing" and start think of it as what it is, an asset swap. Namely swapping cash for equity or debt.
> The banks cannot loan money out unless they have reserves on deposit. Yes I know about fractional reserve banking, but those reserves come from deposits. That's why banks give out free checking. They can loan a multiple out of the cash on deposit. It's also why they have minimum deposit levels.
Nope. Reserves come from the Federal Reserve, they're a different thing. That's right, the money in your deposit account and the money banks use for interbank payments are different "data types" that happen to share the same unit of account.
Banks can and do originate loans in any amount they deem fit when they have a creditworthy borrower. When Mr Banker is deciding whether or not to extend your business a 10 million dollar line of credit, he doesn't call Fred down in the Vault Department to check if there is enough in the money bin or reserve account to originate the loan. He simply sends it off to underwriting, sees if they think your business is creditworthy, and if so originates the loan, which creates a loan liability and a deposit asset on the business's ledger and a loan asset and deposit liability on the bank's ledger. Reserves are not at all involved in the loan origination process. Then before close of business the bank acquires any necessary reserves on the interbank market or from the discount window. And those reserves will always, in aggregate, be available, because the 0th law of the Federal Reserve is "thou shalt maintain the integrity of the interbank payment system."[1]
The fact that reserves have no direct effect on loan origination is precisely why banks are now required to meet capital requirements in addition to reserve "requirements."
> Take some time yourself :-)
I have. Like I said, you're objectively wrong about this. If you're ok with that state of affairs then fine, but since this site is about knowledge and I have great respect for you I thought I'd share.
> "No individuals or private sector entities are permitted to store gold in the vault." -- from your cite
That was mostly humorous. But yeah, money bins are for the elite. Sovereign wealth funds and such.
Incidentally this is true for reserves as well. Individuals are not permitted to open a reserve account at a Federal Reserve Bank. The only way we can actually obtain and hold reserves is via physical Federal Reserve Notes. Obviously that's got a lot of considerable drawbacks, although I'd bet dollars to donuts that the ultra wealthy probably keep somewhere between a hundred thousand and a million bucks in paper money reasonably close at hand for reasons analogous to why normal people have a change jar.
The money is always put to use, one way or another. It is not hoarded, because it's stupid to hoard large quantities of money. You don't get wealthy by being stupid with money.
> Reserves come from the Federal Reserve
Sigh. Remember that Silicon Valley Bank that went bust recently because it didn't have enough on deposit to cover customer redemptions?
> I'd bet dollars to donuts that the ultra wealthy probably keep somewhere between a hundred thousand and a million bucks in paper money reasonably close at hand
You'd lose that bet. There's simply no reason to do that other than if you're doing illegal money laundering.
> Banks can and do originate loans in any amount they deem fit when they have a creditworthy borrower.
No, they have to meet the reserve ratio. Otherwise, they wouldn't offer free checking.
> The money is always put to use, one way or another. It is not hoarded, because it's stupid to hoard large quantities of money. You don't get wealthy by being stupid with money.
To highlight your ignorance let’s avoid distractions and focus on this one point: if the filthy rich don’t have most of the cash, who does? Who has 31 trillion dollars in cash, and isn’t filthy rich?
Remember that cash always exists. If Mr Filthy spends a billion to buy stock from Mr Rich, now Mr Rich holds that billion in cash. That cash billion is always going to be in play.
What chain of accounting operations do you imagine take place that allow the UHNWI sector to divest itself of cash nearly entirely and who is going to hold that cash once they have?
> You'd lose that bet. There's simply no reason to do that other than if you're doing illegal money laundering.
In my personal experience, which is to say the VHNWIs I’ve known (owns property outright in Tokyo, Hamptons, NYC central park overlook, bentley, that kind of guy) it’s been for drugs. An awful lot of blow mainly. I’ve never to my knowledge met an UHNWI so sure I’m extrapolating, but I’m pretty sure the kind of oil sheikh who flies around his arabian stallions and camel herd with him on his private 747 has a mil or two cash handy for whatever.
As to who has it, it's in circulation. It's being used to buy goods and services, and then the merchant does nightly drops to the bank, who credits it to the merchant's account, then hands out the cash for withdrawals and loans.
I would presume that much of the cash in circulation is in the untracked illegal economy, as the cash isn't traceable. Drug dealers hoard millions in cash because no bank will take it.
> If Mr Filthy spends a billion to buy stock from Mr Rich, now Mr Rich holds that billion in cash.
Using emotionally laden words doesn't make your case more compelling. Be that as it may, nobody buys stock anymore with cash. I've been buying stock my entire adult life, never with cash.
> it’s been for drugs
I.e. the black market, which I already allowed runs on cash.
> I’m pretty sure the kind of oil sheikh who flies around his arabian stallions and camel herd with him on his private 747 has a mil or two cash handy for whatever.
Speculation. But indeed, some rich people may have large quantities of cash on hand for use in the black market. After all, an illegal arms dealer isn't going to take your credit card. But that's not hoarding cash, either.
By cash I meant M1[1] which is the general usage (“let me check how much cash is in my account” &c). I’ll allow that I should have been more precise since you’re trying to nitpick your way out if answering the where does that money go question. That’s sitting at $20 trillion ish. Again, this is end of the day money, so vague hand waving about circulating money doesn’t cut it. The overwhelming amount of cash settles end of day. So whose accounts are that $20 trillion sitting in?
To save you some trouble using the rough figure of 115 million “banked” households if you want to claim it’s spread around that would require the median household to have approximately $174,000 in demand deposits, so it’s certainly not there.
Again, you said the ultra rich don’t hold that $20 trillion. Then who does?
Frankly I think you’re just extrapolating incorrectly from your flawed understanding of the banking system and your own presumably HNWI savings allocations. I agree it can be a bit tough to understand there are folks out there for whom a million in notes and coins is a lesser percentage of their net worth than the change in your change jar is of yours.
The thing is, "cash" in one's account is not cash at all and is not being hoarded. It gets loaned out. It's put to use such that it generates interest income.
> there are folks out there for whom a million in notes and coins is a lesser percentage of their net worth than the change in your change jar is of yours.
You argued before that they were hoarding most of their wealth. Now it's a tiny percentage.
Bezos (and other billionaires) were in the paper recently for funding their cash needs by borrowing. Why would they borrow if they had a cash hoard? It doesn't make any sense.
> The thing is, "cash" in one's account is not cash at all and is not being hoarded. It gets loaned out. It's put to use such that it generates interest income.
No, it doesn't. Banks don't loan out deposits; banks originating loans create deposits. It's basic double entry bookkeeping. Your deposit asset is the bank's liability.
Here is a basic, simplified, but essentially correct model:
1) Credit worthy borrower Alice approaches a bank to borrow $1,000,000 to buy some real asset worth $1,000,000 from Bob. Maybe a house, maybe a business, whatever, doesn't really matter.
2) Bank performs underwriting and determines that Alice is in deed credit worthy. Now bank performs the following four operations simultaneously (This is where we simplify, we're assuming Alice and Bob use the same bank to avoid bringing interbank payments in, and other possible complications like an escrow party, but all those extra steps sum out to equivalent to the simple model).
3) Create a deposit in Bob's account with the bank for $1,000,000.
4) Create a corresponding liability on bank's account for $1,000,000, corresponding to Bob's deposit.
5) Create a liability on Alice's account with the bank for $1,000,000.
6) Create a corresponding asset on the bank's account for $1,000,000. This is the asset that banks sell when they sell a loan.
7) Bob transfers the real asset to Alice.
At this point the bank has created $1,000,000 that Bob is going to spend as he pleases, but the bank's total net worth is unchanged, since the bank's new liability is equaled by its new asset. And the bank then expects to earn a return on that asset based on the terms of whatever the loan agreement are. Alice and Bob's respective net worth are also nominally unchanged, because Bob has the new deposit to offset his old real asset, and Alice has the new liability to offset her new real asset.
Now at this point you're going to object about fractional reserve requirements. As it happens they actually never constrained loan origination because the Fed had to supply the exact amount of reserves after the fact, in aggregate, that the banking system required for the loans it originated, because if it didn't the interbank payment system would seize up. However that's quite complicated to demonstrate and I'm not up for it[1].
But fortunately we can ignore that, because there are no reserve requirements anymore[2]:
As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.
> You argued before that they were hoarding most of their wealth. Now it's a tiny percentage.
Tiny percentage of notes and coins. Not M1 cash. And you still haven't answered, who is holding that $20 trillion in M1 cash? If the ultra high net worth individuals are all divesting themselves of all their M1 cash, someone has to be their counterparty. Who?
[1] It is worth understanding though if you're interested. The shocking thing is that reserves and deposits (and coins too, but they're a tiny percentage of outstanding cash money) are entirely different "data types"! They just both happen to be denominated in the same unit of account. Naturally that's not a coincidence but a property of how the modern banking system has been constructed. Reserves mainly come into play for interbank payments and federal government spending. Incidentally coins are also a different type from paper money. That's not particularly relevant to the topic at hand, but the existence of that rabbit hole serves to show just how interesting and complex the money system actually is.
Sorry, but that's what they do. You don't agree, so there's nothing further to talk about.
> Bob transfers the real asset to Alice.
I.e. the bank loaned out Bob's deposit to Alice. The rest is just accounting machinations. Yes, I understand double entry bookkeeping. I got an A on that course (!) and I've been doing the the accounting for my business ever since.
> Sorry, but that's what they do. You don't agree, so there's nothing further to talk about.
Agreed. One cannot educate the obstinate, and you are obstinately clinging to your ignorance here.
Here[1] for example is another explanation and you can easily find more from sources as authoritative as the central banks themselves, who I think we can both agree have a better grasp on the operational mechanics of banking than either of us. I won’t bother to provide those additional links for obvious reasons.
Nevertheless perhaps one day you’ll stop believing the fairy tale version of banking you learned as a boy, and when you do you can refer back.
There are no Scrooge McDuck cash vaults.