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Higher Cash in Circulation is a Good Omen for Economies

Feb. 22, 2021 Share Source

America’s cash in circulation soared in 2020 at a rate not seen since World War II, and that likely means good things in store for the economy, says business news provider CNBC.

According to Federal Reserve data, currency in circulation rose by 11.6 percent over the previous year to a total of $2.07 trillion. This is the largest increase since 1945, when the nation was emerging from the war and the military-industrial complex gained ground.

This is largely thanks to the government’s $2.2 trillion stimulus bill that passed in May, and the Federal Reserve’s digital money printing, which drove up the central bank’s balance sheet by more than $3 trillion. When cash in circulation increases, however, there are typically other forces at work. A key factor has been Americans withdrawing cash for the reassurance it provides in uncertain times. High demand from foreign central banks amid rising demand for dollars has been another factor.

“[Cash is] the one asset that people are pretty confident isn’t going to lose value, and so people are deciding they’d much rather hold more of their assets in cash.
" Eric Rosengren President Federal Reserve Bank of Boston

As more and more cash builds up, there is a tendency for it to seek outlets, and this leads to an economic boom. This pattern was seen in 1983, 1991, 2002 and 2009 after the respective recessions and financial crises. It suggests the U.S. can look forward to improved consumer spending in 2021.

Annual growth of U.S. cash in circulation always peaks at the start of economic cycles… In all the buzz about how the pandemic economy favours virtual money over physical cash, it is worth noting demand for the latter is higher than any other recession.
" Nick Colas Co-founder of DataTrek Research
Last Updated: Feb. 21, 2021

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