Demand for $100 bills has jumped since 2008 as nervous Europeans stuff them under the mattress, providing vivid proof that the world still loves the dollar and confirming the benefit to the US of the currency’s status as a global reserve.
The amount of dollar cash in circulation has risen by 42 per cent in the last five years, with a main reason being demand from Europe. As Europe’s crisis worsened in the spring of 2010, US currency holdings rose sharply. Concerns continued to rise as economic and political turmoil and uncertainty about the future sent Europeans scrambling to convert some of their euros to dollars.
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 strongest demand for dollar cash comes from Argentina and the former Soviet Union. The recent haircut on bank deposits in Cyprus, where many Russians have accounts, may prompt fresh interest in greenbacks.
There was a step change in demand for dollars almost on the day that Lehman Brothers failed in 2008.
In the five years to September 2008, US currency in circulation grew at an average of 3.8 per cent a year; since then the average growth is 7.5 per cent. The share of US currency held abroad has risen from about 56 per cent to nearly 66 per cent in the last five years.
Low bank interest rates in recent years mean that there is less of penalty to holding cash. But the demand for dollars means that the world is, in effect, making a gigantic interest free loan to the people of the United States.
Total dollar cash outstanding of $1,175bn finances about 10 per cent of the US national debt and saves about $29bn a year in interest at today’s rates. If two-thirds of that cash is outside the US then it amounts to a $19bn-a-year gift from the rest of the world – roughly equivalent to the gross domestic product of Cyprus.
Sheila McKinney
