Currency in Circulation and Excess Reserves

I think that Currency in Circulation is a pretty good measure of the real economy.

Rich people don't need cash.  They just pull out their Amex Platinum card even on the golf course to tip the caddy who has an app for that.  Then they have their accountant pay off the bill from a trust fund.  Your middle class debt slave has his salary automatically deposited to his account, and his mortgage and car payment automatically deducted.  Once in a while he might take out cash for a night on the town.

But their is a whole other underclass of working class people who don't trust or use banks at all.  As soon as they get a check, they convert it into cash.  And they pay everything in cash, and if cash doesn't work, a money order.

So what are the numbers?  Exhibit A, Currency in Circulation.

The right hand axis is percent  change times 100 to try to make these similar sized.  As you can see, right now, the cash is at about $1.4 trillion, growing at about 6% per year.  The growth tends to decrease until a recession starts and then it skyrockets.  Another indicator that we are not yet in a recession.

Exhibit B - Excess Reserves

The excess reserves steadily decline, except during periods of quantitative easing.  The excess reserves are of no benefit to anyone. (Except maybe the government, because the Fed collects extra interest in the range of about $100 billlion per year, which it then turns over to the government as a stealth tax and to insure the government's gratitude to their owners, the monied class.)

So my quick analysis of this is that the real economy is growing at about 6% per year.  And quantitative easing had absolutely no impact on that at all, and may have even had a negative impact by making interest rates drop.  (Remember that old prudent people would like to live off the interest on their savings no matter what the crazy Keynesian scientists want them to do and if they are earning less interest they will cut back on spending).

In my opinion, the Fed should engage in quantitative tightening and start draining the excess reserves, starting with the shorter-term notes.  This will cause interest rates to rise naturally, which is a good and healthy thing, which shows respect for the currency, and this will actually help the economy.