A picture illustration shows 100 dollar banknotes in Tokyo
Yuriko Nakao | Reuters
Currency circulation rose last year at a rate not seen since World War II, which historically has been a good sign for the economy.
Amid a massive inflow of funds from the financial and monetary authorities, total circulation rose to $ 2.07 trillion by the end of the year, according to the Federal Reserve.
That was an 11.6% year-over-year increase and the largest one-year percentage increase since 1945 when the nation pulled out of the war and the military-industrial complex moved in.
A major reason was the government’s US $ 2.2 trillion stimulus package in May and the Federal Reserve’s digital money printing that added more than $ 3 trillion to the central bank’s balance sheet.
However, a different dynamic plays a role when the cash in circulation increases.
The huge demand from foreign central banks has been a major component at the moment. The need for cash in times of uncertainty also increases the level.
Times of economic danger have historically coincided with increasing currency circulation. As a rule, when all that money builds up, it looks for somewhere to go, which leads to times of economic boom.
“Annual growth in US cash in circulation always peaks at the beginning of business cycles,” said Nick Colas, co-founder of DataTrek Research, in his daily report.
This was the case in 1983 when the US emerged from its inflation-driven recession; 1991, when the country came out of a downturn; 2002 after the hangover from the dotcom bust; and in 2009 when the financial crisis came to an end.
Using M1 – the basic money supply of a country – as a benchmark, these years recorded a corresponding increase in circulation of 9.6%, 10.2% and 9.8% in both 2002 and 2009.
“While this may be a strange indicator, it has a solid history of marking economic turning points,” wrote Colas. “With all the excitement about how the pandemic economy is favoring virtual money over physical money, it should be noted that demand for the latter is at 2000 levels and higher than any other recession. This gives the idea of ’Cash on the ‘A new perspective and one that should predict an improvement in US consumer spending in the coming months.’