US ECONOMY: Why cash has been piling up during the pandemic – The Economist

Consumers are hoarding banknotes. And perhaps crooks are struggling to launder their ill-gotten gains

Graphic detail  – Aug 13th 2020 – The Economist
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The scramble for cash is not over. According to the Fed’s latest figures, the value of dollars in circulation is growing about twice as fast as the historical average. Since February, it is up by more than 11%. Such hoarding is not an exclusively American phenomenon. In Canada cash in use has increased by more than 14% since February; in Britain and the euro area it is up by 10% and 8%, respectively (see chart). According to Jonathan Ashworth and Charles Goodhart, two economists, consumers are stockpiling cash in emerging markets, too. Brazil, India, Mexico and Russia have all seen unusually high demand for hard currency this year.

It is easy to imagine the pandemic causing demand for paper money to go down, not up. When the virus first emerged, the fear was that infected banknotes could help it spread. Shops discouraged customers from paying with cash, citing health concerns. China’s central bank began disinfecting and quarantining banknotes before recirculating them (in some parts of the country, cash from hospitals, wet markets and buses was destroyed). The Bank of Korea adopted similar measures, as did the Federal Reserve.

Such fears did not deter people from withdrawing their savings and stashing cash under their mattresses. But consumers are not entirely responsible for hoarding money. According to research by Deutsche Bank, a third of the increase in cash in circulation in Europe was caused by banks, stockpiling cash to handle big swings in demand.

Some evidence suggests that the recent growth in banknotes in circulation is the result of a decrease in bank deposits rather than an increase in cash withdrawals. According to John Paul Koning, a researcher at Pollitt & Co, a Canadian brokerage, European firms and consumers are not depositing as much cash into their bank accounts as they normally do, causing the number of euros in circulation to rise. Mr Koning has an intriguing theory as to why this might be so: he suspects that, with so many shops and restaurants closed as a result of the lockdown, crooks have fewer ways of laundering their ill-gotten money so must hold on to it.

Mr Koning reckons that a similar story may be playing out in America, Canada and elsewhere. Something for the Fed to consider when it places its order for 2021.

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Comments

  • kamtanblog  On August 15, 2020 at 1:20 am

    Only fools stockpile (hoarding) cash as it can become TP (toilet paper) overnight.
    FED decides only newly printed notes are accepted as “legal tender” replaced by
    plastic notes.Soon all paper money will be replaced by plastic notes and only plastic notes
    (Newly printed) will be accepted as legal
    tender.
    Q
    Will usd$ remain as world reserve currency ??

    UK £5 £10 £20 notes are all plastic today.
    £50 notes are going plastic also.
    Soon paper notes will not be accepted by banks. Those who are hoarding paper
    money won’t need TP for decades.
    Soon almost everyone will be using
    electronic money…cash history !
    Unfortunately plastic notes cannot be
    used as TP.
    Happy dumping

    Kamtan

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