The recent pattern of money flows into bank deposits suggests growing investor concerns that an inflationary period is looming, according to Dan Geller, executive vice president at researcher Market Rates Insight.
While the amount of money in bank deposits has grown overall, the money is migrating away from less liquid instruments such as CDs and into money market funds, explained Mr. Geller. The most recent data from the Federal Deposit Insurance Corp. shows that during the first nine months of 2009 all bank deposits grew by $65 billion to $9.1 trillion, but a sub-category of less-liquid term deposits such as CDs declined by $278 billion to $2.3 trillion.
“This is an indication of an uneasy feeling about the economic recovery and inflation,” Mr. Geller said. “People are realizing that if they lock their money up they don’t have the flexibility to pull it out if they need to protect against inflation.”
As the economy shifted from a deflationary stance between March and October to an inflationary position starting in November, less liquid bank instruments lost their appeal, according to Mr. Geller.
“December represented the first time in a year that the rate of inflation, at 2.7%, was higher than the average interest rate on deposits,” he said.
This means that if someone purchased a 12-month CD in January 2009, the investment would have lost value over that period on an inflation-adjusted basis.
The data on fourth-quarter bank money flows won’t be released by the
FDIC for at least another week, but based on an 1.4% annual percentage yield for bank deposits, Mr. Geller expects the trend to continue.
“When ordinary people see how money is being diverted by the federal government to the economy, they understand that inflation is imminent,” he said.
By moving money from CDs to money market funds, investors aren’t gaining yield, and might actually be sacrificing yield, but what they are gaining is the kind of liquidity that might come in handy in a hyper-inflationary period.
“For every incremental dollar going into bank deposits, almost $5 is being shifted out of less liquid investments, and this is a trend we can see,” Mr. Geller said. “With a fear of hyper-inflation, people want to be able to withdraw money right away so they can put it into gold or a mutual fund for some protection.”
According to Market Rates Insight, which tracks money flows, fees and rates for banks, the decline in term deposits occurred across accounts of all sizes. Term deposits of $100,000 or less declined by $136 billion to $1.2 trillion, for a 9.9% decline, while term deposits of more than $100,000 declined by $142 billion to $1.1 trillion, for an 11.6% decline.
