Savings in cash are good for the US, not for the investor - June 05, 2016

Savings in cash are good for the US, not for the investor

Some interesting news started to surface on the internet lately: the FED says that there’s $1.4 trillion in circulation, but they only know the whereabouts of 15% of it. So most of the US currency is missing, but that’s not a problem for them: keeping savings in cash is basically free money for the government.

As Mental Floss noted: the 15% of currency we know about is in banks or in everyday circulation. That’s not as interesting as the place of the other 85% of the money.

Some analysts say that a huge part of this money is in the shadow economy, which means that it is used in illegal transactions. The reason is simple: cash is almost untraceable. “At certain points, that [shadow economy] has accounted for more than 20 percent of the country’s adjusted gross income”, writes Mental Floss to show the size of this part of the economy. Others estimate that even if shadow economy is huge, only less than 10% of the missing money circulates there.

So where could be the other 75%, which is still more than $1 trillion? There is no sure answer, but the best bet would be that it’s overseas. The site notes that there’s “some $80 billion in Russia alone”. However, since USD is stable and strong, citizens of other countries are holding to the greenback as well.

What’s more, there are foreign countries that use US dollar as their only currencies. Quartz made a list of these countries: Ecuador, East Timor, El Salvador, Marshall Islands, Micronesia, Palau, Turks and Caicos, British Virgin Islands, Zimbabwe all use USD.

It may seem weird that the US government lets this happen, but it’s actually quite good for the country through seigniorage, which basically means that they are earning money with the missing cash. When FED thinks there’s not enough cash, they can buy treasury bills from banks. This leads to more cash on the streets, and in the meantime more treasury bills at the FED. Treasury bills are earning interest, so when people hold on to USD they give the FED interest-free loan.

But while having cash is good for the US, it’s not always good for the investor. For one, simple USD savings are not diversified, and that might lead to a problem, even if this currency is better than others. (USD had a great 2015 after all.) But altogether, the best investment might be a USD based investment portfolio, since that way we would be able to profit from the strength of the dollar, while earning interest as well.