The Fed’s Fear Scale: Holdings of Cold Hard Cash At A Record

In 1969, notes greater than $100, including the cool $10,000 note  that would still pay for a lot of things, were retired due to “declining demand.” Prematurely, it turns out. Because demand for cold hard cash, despite plummeting use of it for transactions, has surged. Reason: fear.

Modern payment technologies have been taking over transactions. Since 2000, transaction volume via debit cards skyrocketed 18.4% per year, electronic bank transfers 13.5% per year, and credit cards 3.7% per year, reported San Francisco Fed President and CEO John Williams in “Cash Is Dead! Long Live Cash!” Conversely, use of checks dropped by 5.8% per year.

Cash does have advantages: it’s reliable even during blackouts or after earthquakes when nothing works anymore; and it’s anonymous so that companies can’t track you when you by pita bread and hummus, information that years later might lead a promotion-hungry genius at some counter-terrorism office to send drones after you. Because cash is murky, the San Francisco Fed could only estimate transaction volume. And it’s down sharply.

The other reason to hang on to cash is as a store of value, albeit a lousy one as interest income is zero…. Oops, same as most bank accounts! As the Cyprus bail-in debacle has demonstrated, handing your cash over to a bank is nothing but a loan, and when the bank craters, the uninsured deposit, and perhaps even the insured deposit, might evaporate or get a crew cut.

So, in these crazy times of ours, when central banks around the world impose zero-interest-rate policies that force people to lend their money interest-free to banks that are shaky, suddenly cold hard cash that you can move out of harm’s way can be a good option.

And people have figured it out. Since 2007, when the financial crisis started, through 2012, the value of US dollars in circulation jumped 42% to $1.1 trillion, or $3,500 per person in the US. The annual growth rate over those five years of 7.25% is over three times the growth rate of the US economy. Most of it in $100 bills. Over the six months after the Lehman moment in September 2008, $100 bills in circulation jumped by $58 billion, or 10%.

So in 2009, when the Fed tried to bamboozle people into thinking that it solved the financial crisis, or when the Obama administration tried to point at some lonely green shoots, and later when they began hyping the decline in the unemployment rate, and when the Fed bandied about stress-test results to trick people into believing that the TBTF banks were in excellent shape, that their inscrutable balance sheets were sound, and that depositors’ money would be safe and secure… with all these wondrous accomplishments, why did people not return these stacks of $100 bills to the banks?

Cash in circulation does decline, periodically. A small dip occurs after the holiday shopping season at the end of the year. And a much larger dip should have occurred when the Fed and the White House gave the all-clear signal. Instead, the curve of cash holdings steepened. Not exactly a vote of confidence.

There was another culprit. In the spring of 2010, as the Eurozone debt crisis got uglier, holdings of dollars rose sharply. “Economic and political turmoil and uncertainty about the future sent Europeans scrambling to convert some of their euros to dollars,” Williams explains. During that time, the share of dollars held overseas rose from an estimated 56% before the debt-crisis fiasco to nearly 66% by the end of 2012.

Last fall, Eurocrats and Eurozone politicians declared with fake conviction in their voices that they’d vanquished the debt crisis with their bold and wise actions, that all was hunky-dory. People didn’t get it; the curve of cash holdings steepened yet again—because, as Williams writes, “cash holdings tend to rise during periods of political and economic turbulence.”

Terms that defined the Eurozone last fall despite the incessant soothing voices wafting down from the top. Terms that found their meaning in March when the tiny island of Cyprus turned into financial mayhem. And holdings of cold hard cash will surely have spiked again.

Zero-interest-rate-policies expose savers to the risks of lending money to the banks with zero return on their investment, and only an iffy guarantee of their investment. In this arrangement, savers pay for inflation, banks benefit from it. An insidious situation. So in trouble spots around the world, people, motivated by fear and lacking incentives to do otherwise, hoard US dollars as a relatively safe asset, as silly as that might seem, given the Fed’s effort to debase them. Until that curve of dollar holdings inverts, nothing is solved. Meanwhile, those old $10,000 notes would come in handy.

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