The amount of cash in circulation in the U.S. has spiked sharply, an unusual but reliable indicator that the economy is at a bottom.
The spike has an “uncanny” similarity to the cash spike in 1999, DataTrek's Nicholas Colas, a former hedge fund manager, wrote in a note.
A look at physical currency and coin supply changes shows this similarity in stark terms, with enormous spikes during those two moments. On Jan. 3, 2000, the cash supply was 15.3% higher than a year earlier. In late December 2020, cash supply was also 15.3% higher than the year before.
“Notably, 2020’s growth in currency in circulation is not a single sharp spike like 2000, but rather a long period (7 months) of +10 percent growth,” Colas wrote.
A potential explanation for this is the fact that savings rates are up and consumption is down. According to Federal Reserve data, the personal savings rate spiked to new highs – almost 35% – in April and is still at 13% as of the latest data in November.
The last time the rate was in this ballpark was December 2020, when it was 12%. To get to that level again, you have to go back to 1975, when the personal savings rate touched 17%. Though more than 10 million Americans are unemployed, those with jobs continue to earn and accumulate in lieu of spending, pushing that number up.
So what does this mean? “Cash hoarding” is a “quirky” indicator, Colas says, but one that has “a solid history of marking economic turning points,” and has been a “reliable signal of economic bottoms.”
This was the case in 1983 (10% higher savings rate compared to the year before), 1991 (12% higher), 2002 (11%) and 2009 (11%). These moments were economic turning points that marked the beginning of an economic cycle.
Technically, the U.S. is still officially in a recession as the National Bureau of Economic Research has not declared it over.
The M1 component of the money supply (physical currency and coin) makes sense, given the personal savings rate and the fiscal and monetary responses to the pandemic. But the fact that physical cash is in high demand — people are holding onto more of it these days — is especially bizarre because the nature of the pandemic made contactless payments more appealing over the handling of cash. This challenges the idea that cash isn’t playing a role in the economy.
Colas writes that it “should foretell improved U.S. consumer spending in the months to come,” something that’s not hard to believe, since cash isn’t typically used as a savings vehicle but rather a spending vehicle.
Still, it’s hard to know where any excess cash will go. The Fed notes that the personal savings rate is important to pay attention to because “it may generally be viewed as the portion of personal income that is used either to provide funds to capital markets or to invest in real assets such as residences.” So when those rates are high, the market is bullish from both an earnings point of view as people start spending and fueling a recovery, and from a “people will buy stocks” point of view.