Where's Your Cash? Where's Mine?
I begin with a Federal Reserve chart. It's a straightforward chart.
The original chart is interactive. If you put the cursor all the way over to the right, you will learn that there are $1.9 trillion USD in paper money in circulation.
The important thing to observe is this: the upward movement of the graph has been steady. There have been almost no ups and downs. In recessions, there is no downward movement. Year-by-year, currency in circulation increases.
None of this is recent. This goes back at least a generation. We can see the steady increase in currency in circulation in the chart. The idea of some war against currency makes no sense. The chart says it isn't true. More than this, the chart says it is impossible.
I introduce something that has been bugging me for approximately 40 years. It doesn't bug me all the time. It just bugs me every time I think about it. Here is what I think about. This is why it bugs me.
In round numbers, there are 130 million households in America.
So, every so often, I get out my ancient Texas Instruments BA-35 financial calculator. It is in my right-hand top drawer. If it weren't so hard to keep track of the zeros, I would put $2 trillion in the numerator, and I would put 130 million in the denominator. But I easily lose track of the zeros. So, I knock off six zeros from each number. I divide 2 million by 130. I get $15,385.
You try it. What do you get?
This means that, on average, every American household has $15,000 in paper money somewhere in its home.
Somehow, this doesn't ring true, but that's what the numbers tell us.
You don't have to answer the following question on one of the forums. Just answer it mentally. Do you have over $15,000 in paper money in your house?
I'll tell you the truth. I'll be really open about this. I don't have $15,000 in paper money in my house or anywhere else.
If I do not have $15,000 in my house, and you don't have $15,000 in your house, somebody on the forums must have his $15,000, plus your $15,000, plus my $15,000. But, except maybe for Old Guy, I don't think anybody has this much currency lying around. Old Guy may. He really doesn't trust the system. But I'm speaking about the rest of us.
The figure is off-the-wall crazy. Yet this off-the-wall crazy figure is the product of two figures that seem to be reliable, and, more to the point, seem to be reliable over a long period of time. The two figures keep rising steadily. There are no decreases in the supply of paper money, and there are never any decreases in the number of households. They march upward, hand in hand, except the outcome of the mathematical computation says that they cannot possibly be hand-in-hand. American households cannot put their hands on $15,000 in currency.
SHOW ME THE MONEY!
This money is not in bank vaults. How do I know this? Because the Federal Reserve pays interest on excess reserves. Legally, money that is deposited by a commercial bank in an excess reserve account with the Federal Reserve is the legal equivalent of bank vault currency. But bank vault cash doesn't pay the bank a rate of interest. Money deposited in an excess reserve account with the Federal Reserve does pay interest. Bankers aren't crazy. Something is better than nothing. They don't get much on these accounts, but they get something.
I think bank vault cash in large banks is an advertising device. It lets depositors think that there is money in reserve. There is money in reserve, but it's in an excess reserve account at the Federal Reserve.
Paper money is used to supply ATMs in local branches. But the big bank vaults in New York City banks are mainly advertising devices. They are to calm people who deposit a lot of money in them. Even then, I doubt that the ad works. The big money deposited in banks is digital money. It is deposited by various kinds of funds, such as hedge funds. It can be pulled out within 30 days. This is what a modern bank run is all about. Digital money is pulled out of bank A, but is instantly deposited in bank B. The banking system as a whole is in no way threatened by a modern bank run. Individual banks are, but the system isn't.
Let's go back to our missing paper money.
If it's not in your account, and is not in my account, then where is it? It has to be somewhere. Money is always in somebody's possession, except in those rare instances when somebody loses it. But big money is not lost. You would be upset if you lost $15,000 of money. That's why you don't have $15,000 of paper currency somewhere around the house.
As I have reported in the past, the Federal Reserve believes that something in the range of 60% of this money is outside the geographical boundaries of the United States. But nobody knows. There are estimates as low as 40%. There are estimates as high as 70%. Read about them here. I'm willing to go with 60%.
I went to the FRED interactive chart on currency. The increase from early May 2019 to early May 2020 was from $1.73 trillion to $1.91 trillion. In round numbers, that is $180 billion. If half of this is sent outside the country, that's about $90 billion.
Do immigrant American households send this much money back home? I am not just talking about illegal immigrants, which may total 10 million people, and may even total 20 million. We don't know. But if we include all immigrant families, including those that have been here for decades, then it is possible that this much money is being sent abroad. But it's still hard to believe. The longer that a family stays in the USA, the smaller the percentage sent back to the relatives in the country of origin. Also, these families earn digital money: salaries. They do not earn currency off the books.
Also, there is the illegal drug trade. That money is sent abroad. Anyway, the money for the hard drugs is.
That still leaves almost $1 trillion circulating inside the United States. That still leaves a total of about $7,000 per household unaccounted for.
Where is this money?
It is not inflationary money. It is not part of the fractional reserve banking system. When money is pulled out of a digital account into currency, this shrinks the total money supply. If everybody could pull out paper money, and people would not redeposit it in a bank, this would unquestionably create massive monetary deflation, massive price deflation, and a depression like nothing else in history. It would collapse the division of labor. There would be mass starvation. It's unthinkable. So, that is not what has been happening.
What has been happening? The experts at the Federal Reserve are supposed to know, but they don't know. They don't talk about it. The bottom line is this: they can't follow the money. That's a major benefit of paper money: it can't be followed.
Is there an off-the-books economy this large in the United States? No. Most of the productivity is produced at the top. It's a Pareto distribution: 80% of the wealth is held by 20% of the people. These people don't operate in terms of paper currency. Their deals are too big. Currency is limited to people in the bottom 20%. Maybe with respect to illegal drugs, it isn't limited to the bottom 20%. But most transactions in supermarkets are not in currency. If you stand in a Walmart line, most of the people ahead of you pay with plastic cards. They may be on food stamps, meaning SNAP, but they pay with cards. They are not dealing in currency.
CONCLUSIONS
First, there is no war against cash in this country. Second, even if there were, it has never worked. Third, if it worked, it would collapse the economy. Nobody powerful enough to conduct a war on currency would want to see this. It would collapse the power of all governments. They couldn't collect the taxes to make the payments that buy off the public.
A war on currency makes no sense. The chatter about it has been all over the web for 25 years, and has been in the hard money circles for as long as I can remember. There's never any proof of it. We're not told who it is who is conducting this war. We don't see what the benefits of the war are. Yes, the government can trace the flow of funds a little better, but the government can trace the flow of funds with such precision for the vast majority of trades that it doesn't matter if Billy Bob Suggs is using currency to make payments to his buddies in Western Missouri. They don't have much money of any kind, digital or paper. The governments don't collect money from Billy Bob and his buddies anyway. Income taxes at the federal level are not extracted from half the working population, or as it is these days, the working population and the welfare population, which is growing at about 3 million people a week.
Paper money is inherently deflationary. When it is pulled out of a local bank, and it is not redeposited in another bank, the inverted pyramid of fractional reserve banking gets smaller. The money supply shrinks. That is a good thing.
Every dollar of fiat paper currency that is sent abroad has a deflationary effect in the American economy. This money will not be used to buy domestic goods and services. This reduces demand inside the boundaries of the United States. Reduced demand reduces the upward pressure on prices. For those of us who favor deflation over inflation, this is a good thing. For those of us who oppose fractional reserve banking, this is a good thing.
Wherever this money goes, it is not taxed. That is also a good thing.
Wherever it goes, it moves upward steadily. It is part of the American economy. The rate doesn't change, year-to-year. It is nothing to worry about because whatever its effects are in the economy, these effects have been discounted by the existing level of prices. There are few surprises here. That is to say, there really isn't anything to worry about.
I thought I would mention this because there are a lot of things these days to worry about. Let's be more efficient with our worrying.