Thursday, May 5, 2011

Something is happening with dollar currency

The amount of U.S. currency in circulation (most of which is in the form of $100 bills) is increasing at an historically rapid rate—almost 14% annualized over the past three months. As the chart above shows, currency has only grown this rapidly during times of crisis, when demand for dollars surged because the dollar was considered to be a safe haven currency. The world's demand for $100 bills surged in the wake of the Gulf War in the latter half of 1990, in the runup to Y2K in late 1999, when the dollar reached a multi-year peak against other currencies in early 2002, and during the financial/banking system crisis in late 2008. In all of those periods, the value of the dollar was relatively strong and/or rising against other currencies. In the past three months, currency demand has surged again, suggesting we may be in the midst of another crisis.

But there's an important difference this time. As this next chart shows, the growth rate of currency since mid-2010 is no longer correlating to dollar strength. In fact, currency demand has surged as the dollar has fallen. If currency demand were rising because the dollar is considered to be a safe haven during a time of crisis, why is the value of the dollar falling, and even hitting new all-time lows?

Could rapid currency growth over the past year be a precursor to a permanently higher inflation rate? I note that currency growth averaged about 10% per year during the high-inflation, 1974-1980 period, and the value of the dollar was declining throughout that period.  (Currency growth remained rapid in the early 1980s even as inflation plunged, because demand for dollars surged and the dollar rose dramatically against other currencies).

Meanwhile, the M2 measure of the money supply (of which currency circulation is a part) continues to grow at a very normal 5-6% annual rate. For some reason the world has a fairly intense desire to increase its holdings of U.S. currency at the expense of other forms of money.

I'm open to suggestions.


Jake said...

In looking at details of M1 and M2 (, M1 is growing due to cash and checking accounts (demand deposits), while M2 less M1 is growing less so due to a decrease in time deposits (CD's).

My thought is that this is not a supply issue, but rather a lack of demand locking up cash issue. Why have money locked up when you are earning nothing and may need it vs. simply holding cash?

Hence M1 grows, but M2 remains constant.

Stone Glasgow said...

How did you calculate the growth of currency?

Scott Grannis said...

The data comes from the Fed, and I simply calculate the annualized growth rate of rolling 13-week periods.

Benjamin Cole said...

"Could rapid currency growth over the past year be a precursor to a permanently higher inflation rate?"

No, it likely is not.

Inflation is feeble, will stay feeble, has been feeble for years.

Unit labor costs are falling. Commodities are falling, Real estate is falling. So where is the inflation?

The surge in currency could be related to all sorts of strange events, like wars, a spooked public, drug lords, who knows what, Most US currency is held offshore, and where no one knows.

One possibility is some investors are spooked gold and silver will tumble, and are converting to the US dollar. And who knows how much thug billions is running out of the Mideast into US currency? There was a report a few months back of pallets of Benjamin Franklins at airports in Kabul.

Also, if memory serves (and your chart shows) the US dollar exchange rate decreased nearly all through 2000-2008. So why was currency demand strong in 2008, when the dollar was "weakening"? That scenario set up the deflation of 2009-2010.

Also, the chart you are running with this post appears to show the dollar lower in 2008 than now. Was anyone howling about a cheap dollar then?

Jeez, I am exasperated. The dollar helping exports, boosting GDP growth, inflation is dead, and yet some people seem to be grasping for any straws in the wind to show that this is bad.

What is bad is that we have 5 percent of the US population that used to work now not working (a 5 percent decrease in labor participation rates). We have real estate still falling in value, in most categories. We have a Dow still below 1999 levels.

I would say anything we can do to boost output is good, damn the torpedoes and full steam ahead. Tax breaks for business, reg breaks, and print money until the cows come home.

dh said...

B/c indifferent b/w 0% on cash and 0.5% on term dep

William said...

I am not an economist so I would be pleased if someone could tell me what is "The amount of U.S. currency in circulation". How is that calculated and what are the components?

Does it mean the US Treasury is printing more $100 bill or what? Is it just more "drug money" around ;~)

Scott Grannis said...

Re: what is currency? It's the net of all the $1, $5, $10, $20 and $100 bills, plus all the coins, that the Federal Reserve has put into circulation. It is very likely that as much as half of all the currency out there is held overseas.

Scott Grannis said...

Re: currency. There is about $950 billion of currency outstanding, which works out to about $3,000 for every inhabitant of the U.S.

Willaim said...

It's mostly speculation but could it be that there is growing economic trumoil in China. Likewise could some of the current comodity turmoil be people in China selling to cover loses?

Stone Glasgow said...

This does not seem significant. It has happened before and there is little logical reason to fear that an anomaly like this may cause inflation.

The same thing happened on a smaller scale in late 2003, early 2004, and late 2006. I suspect that this graph will normalize and the lines will move in tandem again soon. Fluctuations in printed currency could simply have become more volatile.

McKibbinUSA said...

Too many dollars chasing too few demands for dollars...

Public Library said...

Helicopter Ben. We probably need not look further...

Bill said...

It may have something to do with the craziness in the commodities market. The peak may represent the peak in price for commodities which now appear to be correcting.

Buddy R Pacifico said...

Scott, is it a desire to hold dollars and/or spend dollars due to wealth effect from asset appreciation?

Benjamin Cole said...


When I was in college, back in the typewriter days, there was $700 in outstanding currency for every US resident, and we thought that was strange. The average family of four has $2,800 in the mattress? The growth of credit cards was reducing bona fide cash needs.

Now the figure is up to $3,000 per resident, and the average family of four keeps $12,000 in the mattress.

In a credit card, debit card, electronic transfer nation.

As you point out, no one knows where is all this cash--and I guess it means the cash holders do not worry about inflation either.

My guess is the vast bulk is offshore. Aside from some underground economy types, most people I know prefer not to carry much cash. No need to.

Mike Eliason said...

It has to be black market or offshore. I wonder if there is data showing the volume of commercial transactions that are via electronic means or with cash. My guess is that it's overwhelmingly electronic.

Perhaps it is related to the turmoil in the Middle East?