Don't dilly-dally around with some local banker. Go straight to the Federal Reserve to learn what's going on with the currency(*currency*, in other words, actual dollar bills as opposed to the broader concept of *money* which includes all electronic blips) supply. (And right now, it appears not much is going on.)

Go to http://www.federalreserve.gov/releases/

Then under the title "money Stock and Debt Measures" you will see two subheadings entitled "Releases" and "Historical Data". Releases contains the latest figures. If you click on these you will see the components of M1 money supply. The first component is currency.

Now the currency figure you see for the end of January 1999 is around $463.5 billion. That's higher than the $150 billion that we've all read about. I think the discrepancy comes in because the higher figure is all outstanding US currency anywhere in the world, whereas the $150 figure is an estimate of the amount of currency in the United States alone. (That is a guess on my part, I invite anyone with training to explain further.) I don't think there's any way to track what happens to currency after it leaves the bank vault, so they just try to estimate how much is in the US vs. overseas.

So you can look for yourself and see how rapidly currency is being distributed from the Fed. To me, the pace does not seem to have increased much. I intend to track this site for the next year.

-- Puddintame (dit@dot.com), February 10, 1999

Answers

Hi Puddintame,

The discrepancy comes about because 2/3 of the US currency is in the hands of foreigners. Since the dollar is the current global currency of choice, it's no wonder that most US currency is outside our borders. Additionally, only about 1/3 of the currency in the US (less than $50 billion) is currently held by banks.

-- Nabi Davidson (nabi7@yahoo.com), February 10, 1999.

Nabi, Am I correct that the only way for the "Currency" component of M1 to grow is for the banks to distribute additional currency from their vaults, and that examining this figure would be the best single way to objectively determine whether a run is in the making?

-- Puddintame (dit@dot.com), February 10, 1999.

Puddintame,

M1 already includes cash held in bank vaults in the form of required reserves. Currently, M1 (which is made up of coin & paper currency, checkable deposits, and travelers' checks) only grows by banks loaning against EXCESS reserves.

For the currency component of M1 to grow, additional cash would have to be put into circulation by the Federal Reserve. This could be done by printing and distributing more physical currency than is retired due to normal wear and tear ("mutilation").

The Fed reportedly has $150 billion in currency warehoused and is planning to print an additional $50 billion by the fourth quarter of 1999. The release of these cash reserves will increase the currency component of M1.

Regarding determining bank runs from an examination of M1 figures, that would be difficult (if not impossible) to do with publically available figures. The most likely result of slow, steady cash withdrawals on M1 would be a slowdown in the growth of M1. This is because customer removal of cash impedes the banks production of "money" by lowering the amount of excess reserves which banks use to create "money."

However, significant cash withdrawals will be readily noticeable by the public before the Fed can release "official" figures. IMHO, this will negate the need for any statistical analysis at that point.

You can rest assured that banks are now closely monitoring withdrawal patterns in order to detect a change in customer behavior. The information I've seen is that the patterns have changed enough to spook most bankers, but they are still hoping to head off the major runs through PR ("propaganda reports"). Time will tell, but I don't think so...

-- Nabi Davidson (nabi7@yahoo.com), February 10, 1999.

Here's a great link for somebody trying to research this and related topics...

http://www.logoplex.com/resources/ameagle/mbugpg.html

-- Kevin (mixesmusic@worldnet.att.net), February 10, 1999.

The link I just gave has the tools needed to calculate the current bank reserve ratio (RR).

-- Kevin (mixesmusic@worldnet.att.net), February 10, 1999.

Kevin: thanks -- lots of good info and links

-- A (A@AisA.com), February 10, 1999.

Hey Puddintame, Thought you might want to see this. Emphasis is by me. Check out the FDIC funds available near the bottom... What percent is that of total on deposit??? Huh oh! Oh yea, and it's backed by the full FAITH and debt of the USA!

http://www.fdic.gov/consumer/consnews/cnfall98/guar anty.html

The FDIC's Year 2000 Guarantee: "Insured Deposits Will be Fully Protected"

FDIC Chairman Donna Tanoue has made the Year 2000 issue a priority for the agency. FDIC Consumer News asked Chairman Tanoue to give our readers insights on how the FDIC's Y2K efforts will serve the interests of banking customers.

Chairman Tanoue, what do you see as the key roles for the FDIC in protecting the consumer against Year 2000 problems?

I believe the FDIC has two roles. First, the FDIC has the unique responsibility of maintaining public confidence in banks and savings institutions. We are reminding banking customers that their insured deposits are safe, just as they have been throughout the 65-year history of the FDIC. Our second role is as a bank regulator. The FDIC and our sister regulators on the federal and state level are monitoring the steps that institutions are taking to prevent disruptions in service in the Year 2000.

You mentioned the FDIC's role of maintaining public confidence. Consumers probably want the FDIC to guarantee that their bank or savings institution won't have problems from the Year 2000 situation, but we can't do that, can we?

No. Bankers are taking steps to ready their institutions for the century date change. Bankers are reviewing systems, testing computers and preparing back-up plans to cover realistic contingencies. The FDIC cannot guarantee that every one of the 10,000 banks and savings institutions we insure will have absolutely no problems from the Year 2000 date change. But we can guarantee one thingthat insured deposits will be fully protected.

What's a good example of recent FDIC actions that you believe will be especially helpful in minimizing problems for bank customers in the Year 2000?

Well, there are a lot to choose from, but I'd like to reiterate the importance of our role as a banking supervisor. The FDIC and the other bank regulatory agencies have been very pro-active in our approach to Y2K-related supervision. At every opportunity, we have been educating bankers about what is expected of them to get their institutions Y2K-ready. Then we have been following up with on-site examinations of banking institutions as well as data service providers and software vendors that institutions use to transact business electronically. We want to know whether each institution is fully addressing the Year 2000 issue.

One last question, Chairman Tanoue. What if a consumer asked for your opinion on what he or she should know about the Year 2000 problem or should be doing to prepare for itwhat would you say?

I would emphasize three points. Number one: FDIC-insured deposits are safe, just as they always have been. The FDIC's protection of insured deposits will not be affected by the Year 2000.
The FDIC has close to $39 billion in its deposit insurance funds, and FDIC-insured deposits are backed by the full faith and credit of the United States government.
Number two: Consumers should know that the banking industry is taking actions that are designed to make sure that institutions' computers will function in the Year 2000. Consumers may want to call or visit their own banking institution to become more familiar with what it is doing to get ready for the Year 2000.
Finally, point number three: The FDIC and other government authorities are doing everything we reasonably can to prevent problems for consumers and to ease the impact of any disruptions that may occur.

[ FDIC Home ] [ Contents ] [ Back ] [ Next ]

-- Rainy Day (outahere@thedropofahat.com), February 10, 1999.

Nabi, Kevin and Rainy, Thanks for the info. Good stuff.

Nabi, I'm trying to pick your brain here to see if are in agreement on my fundamental point. You wrote:

"For the currency component of M1 to grow, additional cash would have to be put into circulation by the Federal Reserve. This could be done by printing and distributing more physical currency than is retired due to normal wear and tear ("mutilation")." Now, that is my premise also. Here's what I want you to address Nabi.

At the Fed's website, M1 is not just stated as a gross number. The components are broken out individually. Currency is stated separately. So we can quantify the currency change component of M1 on a weekly basis. This figure seems to grow at a rate of about .6% (that's "point six percent" per month.)

Now if we monitor that figure weekly and see a significant increase in the rate growth in the currency then that tells us depositors may be changing their behavior.

Likewise, if the rate of currency growth increases to the point that it can be extrapolated that the newly printed $50 to $70 billion in greenbacks will be absorbed, then in essence we will know that we're facing TSHTF, at least from the banking system viewpoint.

So, Nabi, please address those issues. Especially the fact that currency can be monitored separately from the overall M1 figure.

-- Puddintame (dit@dot.com), February 10, 1999.

Puddintame,

OK, I see where you're going now. Yes, the Fed's release of cash into the system should be detectable using the M1 currency numbers if they are reported accurately. However, I don't think it's beneath the Fed to use some arcane currency calculation tricks in their reporting methodology to obscure the issuance of the cash, if they feel that the public knowledge of its release could cause "panic." But in theory, if the Fed is slowly increasing the amount of cash in circulation, the M1 currency numbers should show the addition.

-- Nabi Davidson (nabi7@yahoo.com), February 10, 1999.

Nabi, Good point. The Fed is probably capable of "cooking the books" over the short term to create their own reality. For instance, we know there is some intentional manipulation because the figures are "seasonally adjusted", although theoretically this is to increase the reliability of the figures. Moreover, the Wall Streeters would probably be privy to any sinister manipulation so that they would not be misled.

But , overall, I believe that the Fed will keep publishing numbers in its normal fashion. If not, then it's a sign that we're really screwed.

-- Puddintame (dit@dot.com), February 10, 1999.