Friday, January 7, 2011

Bernanke is (Indirectly) Printing Money

The Department of the Treasury is a treasure-trove of fascinating information.

Compare the ratio of the number of $1 and $100 bills produced in selected years. In FY 1980, the ratio was 19:1.  In FY 1999, just prior to the dot.com bust, the ratio fell to 2.3:1.  Two years later, FY 2001, it rose to 26:1, but fell sharply the next year to 4.8:1.

The most dramatic trend is the financial crisis years of 2007-09, with the ratio of $1 to $100 bills produced in FY 2007, FY 2008, and FY 2009 respectively at 3.8:1, 2.6:1, and 1.5:1.  Hundred dollar bills were produced like hotcakes in FY 2009.

It is estimated that over half of the value of U.S. currency is held overseas, a ratio that has been relatively constant for some time.  The huge volume of money pumped into the U.S. economy by the federal government's stimulus and the Federal Reserve Board's quantitative easing likely resulted in a massive increase in demand for cash.  The total amount of cash in circulation rose from about $625 billion at the end of 2008 to $829 billion at the end of 2010.

Technically speaking, Bernanke is not pressing the button that runs the high-speed intaglio printing machines at the Bureau of Printing and Engraving. But the growth in the fed’s balance sheet from $930 billion on August 8, 2007, to $1.53 trillion on October 1, 2008, to $2.43 trillion at the end of 2009 surely helped fuel the demand for high-denomination notes.  The demand was accommodated by churning out a huge increase in  $100 bills, from 688,800,000 in FY 2005 to 1,785,600,000 in FY 2009, a nearly threefold increase.  It should be noted that the $100 bill has an average life expectancy of 88 months, four times longer than the $1 bill, which lasts 21 months.

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