In the face of ongoing instability in the Eurozone, people are hoarding dollars. No, not interest-bearing Treasury bills, but good old fashioned greenbacks. According to the San Francisco Fed’s President John Williams, the amount of cash in circulation has risen by 42 percent in the past five years. Here’s the key paragraph from this morning’s Financial Times which puts this in perspective:
The surge in demand for US cash suggests that the world is worried about the safety of its banks and the future of the euro – but has no fear of inflation or default in the US. High budget deficits in the US have prompted warnings of a debt crisis, but no asset is more vulnerable to default or rising prices than paper money, because it does not pay any interest.
The FT piece then goes on to do some math, and calculates that this kind of investment could amount to up to “a $19 billion-a-year gift from the rest of the world—roughly equivalent to the gross domestic product of Cyprus.”But Americans, don’t get smug. This is less a vote of confidence in Ben Bernanke than a vote of no confidence in Europe’s increasingly dysfunctional banking and monetary systems. The dollar isn’t the slowest zebra in the herd, which is good news in a way, but the whole herd is looking pretty lame.