Triggering a showdown — Government of Mexico v. Central Bank — over paper dollars, with ramifications in the US and globally.
By Wolf Richter of WOLF STREET.
The amount of “currency in circulation” – the paper dollars wadded up in people’s pockets and purses, stuffed under mattresses, or packed into suitcases and safes overseas – jumped again in the week ended December 30 to a new record of $2.09 trillion, according to the Federal Reserve’s balance sheet, where currency in circulation is a liability, not an asset. This was up by 16%, or by $293 billion, from February before the Pandemic. The amount has doubled since 2011:
This amount of currency in circulation is a function of demand – and that demand has been red hot: US Banks have to have enough paper dollars on hand to satisfy demand at ATMs and bank branches. Foreign banks will also request paper dollars from their correspondent banks in the US, or return unneeded cash to them.
When there is demand for paper dollars, banks buy more of them from the Fed. They pay for them usually with Treasury securities they hold or with excess reserves they have on deposit at the Fed.
The surge of paper dollars is a sign of hoarding, not of increased payments. In the US, the share of paper dollars for payments has been declining for years, replaced by electronic payment methods, such as credit and debit cards, PayPal, Zelle and similar systems, all kinds of smartphone-based payment systems, the automated clearinghouse (ACH) system, and checks every now and then.
During periods of uncertainty, people load up on cash, as they have done leading up to Y2K, during the Financial Crisis, and now during the Pandemic.
But much of the hoarding of US dollars takes place overseas, with demand for those paper dollars then winding its way to the US banking system via the correspondent banks. These paper dollars also lubricate all kinds of corruption, drug trafficking, and other activities – and laundering this cash is a big profitable industry.
But these paper dollars overseas can pose their own challenges, such as in Mexico where the Bank of Mexico is now facing off against the government over the paper dollars at a Mexican bank that can no longer unload them…