Current Increased cash circulation is a good sign for the American economy

Current Increased cash circulation is a good sign for the American economy

The total currency in circulation—including a large influx of cash from fiscal and monetary authorities—increased to $2.07 trillion by the end of 2020, according to a report by the Federal Reserve data.

 

This is an 11.6% gain from 2019, and it’s currently the biggest one-year percentage increase since the end of the Second World War. Historically, an increase in cash circulation has been a good sign for the economy.

Stimulus checks paid by the government plays a huge factor in the current Increased cash circulation

The $2.2 trillion stimulus bill passed by the government in may-along with digital money printing—saw the central bank balance sheet swell by more than $3 trillion.

 

Other reasons, like increased demand for dollars from foreign central banks have also played a role in the increased cash circulation.

Economic troubles have historically led to huge boosts to the economy

Historically, times of economic troubles coincide with rises of currency in circulation. Annual growth of US cash in circulation always peaks at the start of economic cycles,” Nick Colas, co-founder of DataTrek Research, said in his daily report.

 

This happened in 1983, when the U.S. was heading out of its inflation-induced recession; 1991, as the country was coming out of a downturn; 2002 following the hangover from the dot-com bust; and 2009 as the financial crisis was coming to an end.

 

Using M1—a country’s basic money supply—as the yardstick, those years saw respective circulation growth of 9.6%, 10.2%, and 9.8% in both 2002 and 2009.

 

“In all the buzz about how the pandemic economy favors virtual money over physical cash, it is worth noting that demand for the latter is at Y2K levels and higher than any other recession. This gives a fresh perspective to the idea of ‘cash on the sidelines,’ and one that should foretell improved US consumer spending in the months to come,” Colas wrote.

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