LONDON: In the decade since the 2008 crisis, plenty of weird things have occurred in the world of finance.
But this week a new phenomenon was observed that might make even economists and financiers blink.
Torsten Slok, Deutsche Bank’s chief international economist, spotted that the volume of hundred-dollar bills in circulation had, according to data compiled by the US Federal Reserve, doubled since 2008, leaving around 12.5 billion of these bills stuffed into wallets, safes and suitcases globally.
That’s US$1.25 trillion.
WHY SO MANY BILLS
Given that we are supposed to be living in a digital era, with credit cards, bitcoin and so on, this strikes me as odd; doubly so, perhaps, since some, such as Tesla chief Elon Musk, predict that cash will soon disappear.
Stranger still, the rise means that, for the first time in history, the volume of US$100 bills has eclipsed that of single-dollar notes, making the former the most widely used note.
Demand has surged even as the Fed has raised US interest rates. This defies economic logic, which suggests that at a time of rising rates consumers should take their money out of cash and put it into more productive investments, such as stocks or bonds.
“It’s the opposite of what an economics textbook might say,” Slok points out, noting that it is “very peculiar” to have US$1.25 trillion of financial “dry powder” sitting in “dead” assets such as cash, not earning any return.
Why has this happened? Slok admits that he is not entirely sure; and while his research note has sparked debate among Deutsche’s clients, nobody else seems confident of the answer either.
RULING OUT EXPLANATIONS
A few potential explanations can be ruled out: American consumers are not using all these bills for everyday life. Research from the Boston Fed in 2012 suggested that while “cash is still the most common method of payment for consumers (40.3 per cent of the number of payments per month) . . . on a typical day in the US, 5.2 per cent of consumers have a US$100 bill in their pocket, purse or wallet”.
Fed policy offers no easy explanation either: although it has pumped liquidity into the system, this did not necessarily need to go into US$100 bills.
This leaves us looking for other reasons why consumers might want these bills. One could be crime.
“There is a significant body of evidence that a large percentage of currency in most countries, generally well over 50 per cent, is used precisely to hide transactions,” says Kenneth Rogoff, a Harvard economics professor.
Moreover, as an influential paper from Peter Sands, former chief executive of Standard Chartered bank, noted a couple of years ago, criminals generally want to use the largest denominations they can find — such as the US$100 note or a €500 bill.
To make the current pattern doubly suspicious, researchers at the Chicago Fed estimate that about four-fifths of large-denomination bills are now sitting outside the US, up from a third in 1980.
As Slok points out, however, there is no evidence that the use of US$100 bills rose after the abolition of the €500 note (the €200 note is still in circulation). Nor is there compelling evidence that criminal activity has doubled since 2008.
Slok suspects that there are non-criminal reasons behind this pattern too. Western consumers may be hoarding cash because they are fearful about the future of the financial system and relaxed about inflation risks.
Geopolitical turmoil is almost certainly another factor. As Ruth Judson, a Fed economist, pointed out in a paper a couple of years ago: “Once a country or region begins using dollars, subsequent crises result in additional inflows.”
For example, refugees fleeing Middle Eastern wars may be hoarding US$100 bills. China’s wealthy elite may be doing likewise, because they do not trust the future of their own economic system and currency.
The same could be true of rich Russian families, particularly because banks in countries such as Switzerland have become stricter about imposing rules to tackle money laundering.
HARD TO TRACE
Then there is a more recent factor: Since US laws do not currently let American banks or credit card companies handle finance linked to the booming marijuana business, this may also be boosting demand.
We are unlikely ever to know with much confidence which of these explanations is correct unless some financial sleuth actually uncovers a trillion-dollar treasure trove of these bills. The nature of cash — unlike digital transactions — is that it is hard to trace.
That doesn’t stop us relishing the irony here.
Although we live in an era obsessed with innovations such as “contactless” transactions, some tangible goods and relationships matter deeply, especially in a disembodied cyber world.
Cultural change does not occur in a straight line, let alone in the way that tech’s whizz-kids might expect. Silicon Valley, take note.