Where's All the (Fake) Money?
By Philippe Gastonne - May 20, 2015

Is cash still king? Based on data from the Federal Reserve Board, you might think so. The Fed routinely tracks M1, which covers cash plus checking deposits. In March, the cash component of M1 had a face value of $1.3 trillion, a record high.

About $1 trillion of that $1.3 trillion is in $100 bills. Another $300 million is in denominations of $500, $1,000, $5,000 and even a gasp-provoking $10,000. (These bills haven't been produced in decades, but remain in circulation.) The rest, nearly $300 billion—also a record high—is in denominations of less than $100, with workhorse $20 bills accounting for most of that value. – Barron's, May 15, 2015

U.S. currency in circulation is now about $11,000 per U.S. household. It was only $7,000 per household in 2008. Years of QE seem to have enlarged the inventory of both electronic blips and paper currency.

"Where is all this currency?" asks Barron's. "The Fed can only tell you with certainty where it is not. It's 'outside' the U.S. Treasury or any of the Federal Reserve Banks, and outside the vaults of commercial banks and all other depository institutions. It must therefore be currency in circulation."

The Federal Reserve claims ignorance of this currency's precise location, and for once we can probably believe them. Few American households have their $11,000 share stuffed in the mattress. Most paper dollars are probably outside our borders.

Barron's notes the greenback is the dominant medium of exchange in places like Panama, El Salvador, East Timor and the British Virgin Islands. It is common in Iraq, Lebanon, Bermuda and Zimbabwe. In fact, almost anywhere on the globe a Ben Franklin note will work just as well as (or better than) the local scrip.

Why are paper dollars so widely recognized and accepted? Among other reasons, the U.S. Treasury's advanced anti-counterfeiting measures let everyone from drug lords to back-alley rice peddlers know they have "real" dollars. That probably wasn't the intent, but it is certainly the result.

The US's own underground economy is probably growing, too. The last decade brought a surge in the number of people below retirement age receiving Social Security disability benefits. Many retiring Baby Boomers are finding it necessary to supplement their Social Security benefits with whatever work they can find.

Both groups need to keep their side income off the books in order to keep their federal benefits. Cash under the table is the way they do it. Add in the illegal aliens plus the criminal parts of the underground economy, and it takes a lot of cash to keep the wheels turning.

For bitcoin and other alternative currencies, this huge off-the-books economy resembles the "last mile" problem telecom companies once faced. Someone has to extend connectivity from the backbone out to the smallest end users. For now, paper dollars do the job.

We will know the tide has turned when M1's cash component starts to shrink. It hasn't happened yet – but it will.

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